Functions of Accounting
Financial Accounting performs the following nature functions:
(i) Maintaining systematic records: Business transactions are properly recorded, classified under appropriate accounts and summarized into financial statements–income statement and the balance sheet.
(ii) Communicating the financial results: Accounting is used to communicate financial information in respect of net profits (or loss), assets, liabilities etc., to the interested parties.
(iii) Meeting legal needs: The provisions of various laws such as Companies Act, Income Tax and Sales Tax Acts require the submission of various statements, i.e., annual account, income tax returns, returns for sales tax purposes and so on.
(iv) Protecting business assets: Accounting maintains proper records of various assets and thus enables the management to exercise proper control over them with the help of
following information regarding them:
(a) How much is balance of cash in hand and cash at bank?
(b) What is the position of the inventories?
(c) How much money is owed by the customers?
(d)How much money is owing to the creditors?
(e) What is the position of various fixed assets and how these are being used?
(v) Accounting assists the management in the task of planning, control and coordination of business activities.
(vi) Stewardship: In the case of limited companies, the management is entrusted with the resources of the enterprise. The managers are expected to act true trustees of the funds
and the accounting helps them to achieve the same.
(vii) Fixing responsibility: Accounting helps in the computation of the profits of different departments of an enterprise. This would help in fixing the responsibility of departmental heads.
Accounting|Advantages of Accounting
Advantages of Accounting
(i) Assistance to management: The accounting information helps the management to plan
its future activities by preparing budgets in respect of sales, production, expenses, cash, etc. Accounting helps in coordination of various activities in different departments by providing financial details of each department. The managerial control is achieved by analyzing in money terms the departures from the planned activities and by taking corrective measures to improve the situation in future.
(ii) Records rather than memory: It is not possible at all to do any, business by just remembering the business transactions which have grown in size and complexity.
Transactions, therefore, must be recorded early in the books of accounts so that necessary information about them is available in time and free from bias.
(iii) Intra-period .comparisons: Accounting information when recorded properly can be
used to compare the results of one year with those of previous year(s).
(iv) Aid in legal matters: Systematically recorded accounting information can be produced as evidence in a court of law.
(v) Help in taxation matters: Income Tax and Sales Tax authorities could be convinced about the taxable income or actual turnover (sales), as the case may be with the help of
(vi) Sale of a business: In case, a sole trader or a partnership firm or even a company wants to sell its business, the accounting information can be utilized to determine proper purchase price.
Limitations Advantages of Accounting |ACCOUNTING
Limitations Advantages of Accounting
(i) Accounting information is expressed in terms of money. Non-monetary events or transactions, however important they may be, are completely omitted.
(ii) Fixed assets are recorded in the accounting records at the original cost, that is, the actual amount spent on them plus, of course, a incidental charges. In this way the effect of inflation (or deflation) is not taken into consideration. The direct result of this practice is that balance sheet does not represent the true financial position of the business.
(iii) Accounting information is sometime based on estimates; estimates are often inaccurate.
For example, it is not possible to predict with any degree of accuracy the actual useful life of an asset for the purpose of depreciation expense.
(iv) Accounting information cannot be used as only test of managerial performance on the basis of more profits. Profits of a period of one year can readily be manipulated by omitting such cost of advertisement, research and development, depreciation and soon.
(v) Accounting information is not neutral or unbiased. Accountants calculate income as excess of revenue over expenses. But they consider only selected revenues and expenses. They do not, for example, include cost of such items as water or air pollution, employee’s injuries etc.
(vi) Accounting like any other discipline has to follow certain principles which in certain cases are contradictory. For example current assets (e.g., stock of goods) are valued on the basis of cost or market price whichever is less following the principle of conservatism. Accordingly the current assets may be valued on cost basis in some year and at market price in other year. In this manner, the rule of consistency is not followed regularly.
Accounting|The Users of Accounting Information
The Users of Accounting Information
Financial accounting is primarily concerned with preparation of accounting information for the outsiders who do not have direct excess to the accounting records. They obtain accounting information of business enterprises from their annual reports, data published by Government departments and information published in financial newspapers, e.g., the Economic Times, Financial Express etc., or business magazines e.g., Business India, Business World, The Economist, etc. In the following paragraphs, the users of accounting information have been
grouped into a number of major headings and the requirements for each considered therein:
Creditor and short-term lenders: Creditors include suppliers of goods and services on credit. Short-term such as commercial banks supply money for short period to business organizations. Bankers and suppliers inspect the accounting information before making loans orgranting credit. They want to know whether or not the enterprise will be able to meet its financial
repayment obligations in time. Their specific interest lies in solvency, liquidity and profitability
positions of the business enterprise. Accounting serves their purpose by disclosing true and fair view of current assets in the balance sheet and profitability position in the income statement so as to assure the creditors and lenders that their debts would be paid in time.
Investors : Under this category are included the existing shareholders and future shareholders. Basically they will be interested in the dividends that are paid. They are also interested about the future prosperity of their enterprise. But the income statement and the balance sheet of one year will not be helpful to guide the investors about the future prospects. So
the accounting information must provide the details of the profits and financial position of business so that the investors can find out the progress of the past few years and it may be assumed that this progress will be maintained in future as well. At present such information is generally given in the published accounts. The statement of the chairman in the annual reports also provides some indication about the future progress.
Long-term lenders : This category of users include debenture holders and those providing
long-term loans, say; industrial banks, financial institutions, etc. They are interested in knowing that they will get the interest due to them and that the same will be paid when it is due and payable. They will also see to it that their principal amount is also paid on due date. So their main interest is in the profitability for interest payments and liquidity for the repayment of the loan amount. The availability of cash flow statements in addition to income statement and balance sheet has considerably helped users to evaluate the liquidity position of a business enterprise.
Management : The owners are not the only persons within the business enterprise who are interested in various aspects of the operations of a business. With the separation of management and ownership (particularly in a limited company), the managers are responsible for carrying on the operations of the business enterprises. The type of accounting information needed by managers may vary with the size of the enterprise. The manager of a small business may need relatively little accounting information. As the business enterprises grows in size, the manager loses direct contact with daily operations. As a result, information about the various aspects of
the business enterprise must be supplied by accounting. Some of their needs for accounting information relate to: (i) setting objectives or targets for future periods and devising methods to attain those objectives;
(ii) observing and measuring the performance of the various departments
of the business as also the enterprise as a whole; (iii) evaluating the performance in relation to
the targets set up; highlighting the deviations from the planned targets; and (iv) taking such corrective action as may be necessary to overcome the shortfalls.
Employees (Labour unions) : In .this category are included both individual employees and groups of them represented by labour unions. Employees want more salary and other benefits
such as overtime payments, bonus, housing, medical facilities and so on. The bargaining power of the unions is increased if workers’ demands are based on facts and figures. In addition, some companies regularly issue certain reports containing financial information about the employers
Monetary bookkeeping is principally worried about readiness of bookkeeping data for the pariahs who don’t have guide abundance to the bookkeeping records. They get bookkeeping data of business undertakings from their yearly reports, information distributed by Government divisions and data distributed in money related papers, e.g., the Economic Times, Money related Express and so on., or business magazines e.g., Business India, Business World, The
11 Business analyst, and so on. In the accompanying sections, the clients of bookkeeping data have been assembled into various significant headings and the prerequisites for each considered in that:
Leaser and momentary banks: Creditors incorporate providers of merchandise and enterprises on credit. Momentary, for example, business banks supply cash for brief period to business associations. Brokers and providers investigate the bookkeeping data before making advances or conceding credit. They need to know regardless of whether the venture will most likely meet its money related reimbursement commitments in time. Their particular intrigue lies in dissolvability, liquidity and gainfulness places of the business venture. Bookkeeping fills their need by unveiling genuine and reasonable perspective of current resources in a critical position sheet and productivity position in the pay proclamation so as to guarantee the banks and loan specialists that their obligations would be paid in time.
Financial specialists : Under this class are incorporated the current investors and future investors. Fundamentally they will be keen on the profits that are paid. They are moreover intrigued about the future thriving of their undertaking. However, the pay explanation and the accounting report of one year won’t be useful to manage the financial specialists about the future prospects. So the bookkeeping data must give the subtleties of the benefits and money related position of business with the goal that the financial specialists can discover the advancement of the previous couple of years and it might be accepted that this advancement will be kept up in future too. At present such data is for the most part given in the distributed records. The announcement of the executive in the yearly reports additionally gives some sign about the future advancement.
Long haul banks : This class of clients incorporate debenture holders and those giving long haul credits, state; mechanical banks, money related organizations, and so on. They are keen on knowing that they will get the enthusiasm because of them and that a similar will be paid when it is expected and payable. They will likewise make sure that their main sum is additionally paid on due date. So their primary intrigue is in the benefit for intrigue installments and liquidity for the reimbursement of the advance sum. The accessibility of income articulations notwithstanding salary proclamation and accounting report has significantly helped clients to assess the liquidity position of a business venture.
The board : The proprietors are by all account not the only people inside the business endeavor who are inspired by different parts of the tasks of a business. With the detachment of the board what’s more, possession (especially in a restricted organization), the administrators are in charge of conveying on the tasks of the business endeavors. The sort of bookkeeping data required by chiefs may shift with the measure of the endeavor. The supervisor of a private company may require moderately small bookkeeping data. As the business ventures develops in size, the director loses coordinate contact with day by day activities. Therefore, data about the different parts of the business venture must be provided by bookkeeping. A portion of their requirements for bookkeeping data identify with:
(I) setting goals or focuses for future periods and conceiving techniques to achieve those targets;
(ii) watching and estimating the execution of the different divisions of the business as additionally the endeavor in general; (iii) assessing the execution in connection to the objectives set up; featuring the deviations from the arranged targets; and
(iv) taking such restorative activity as might be important to defeat the setbacks.
Representatives (Labor associations) : In .this classification are incorporated both individual workers and gatherings of them spoken to by worker’s guilds. Workers need more compensation and different advantages for example, extra minutes installments, reward, lodging, therapeutic offices, etc. The haggling power Of the associations is expanded if laborers’ requests depend on statistical data points. Also, a few organizations normally issue certain reports containing budgetary data about the businesses
12 for a superior comprehension of the business by the representatives. These reports feature what the organizations are improving the situation the welfare of their representatives and what they expect to do in future.
Government and administrative organizations : as of late, the legislature has turned out to be one of have the duty of allotting the assets for various employments. Normally they are intrigued in the exercises of business endeavors, for example, deals, benefits, profit approaches, speculations, and so on. Besides, the Government exercises are financed through the gathering of assessment. Therefore, the bookkeeping data about business exercises is useful in the accumulation of pay impose, extract obligations, traditions obligations, deals charge, and so on. Each expense requires a unique government form dependent on important bookkeeping data of different business ventures. Any twisting in the bookkeeping data required by the Government organizations would antagonistically influence the welfare arrangements of different sorts of governments. Correspondingly various administrative offices like Securities and Exchange Board of India (SEBI), the Insurance Regulatory Authority, the Reserve Bank of India and so forth., require bookkeeping data for the productive task of capital markets.
People and society : People are influenced by the tasks of a business venture in their territories. They need to know through the bookkeeping data the patterns in the thriving of the undertaking and furthermore the scope of exercises. This would empower them to evaluate the business openings in their neighborhoods. Society in general is worried about the condition contamination. The bookkeeping data would reveal how much cash has been apportioned to control such contamination. This has come to be known as social duty bookkeeping.
Branches of Accounting
Bookkeepers will in general have practical experience in different kinds of bookkeeping work and this has brought about the improvement of various parts of bookkeeping. A portion of these divisions of bookkeeping are given as:
(I) Financial Accounting : Accounting intended for untouchables (people other than proprietors what’s more, administrators) is known as monetary bookkeeping. It is worried about the account of business exchanges and intermittent planning of monetary records and salary explanation from such records. As such, the money related bookkeeping is valuable for the finding out benefit or misfortune made amid a given period and monetary position toward the finish of the period.
(ii) Management Accounting : It is worried about the elucidation of bookkeeping data to control the administration for future arranging. Basic leadership control, and so forth. The board Accounting, in this manner, serves the data needs of the insiders, for example proprietors, chiefs and representatives.
(iv) Cost Accounting: It has been produced to learn the expense acquired for completing
different business exercises and to assist the administration with exercising strict cost control.
(v) Tax Accounting: This part of bookkeeping has developed in light of the troublesome assessment
laws, for example, identifying with pay charge, deals assess, extract obligations, custom obligations, and so on. An bookkeeper is required to be completely mindful of different duty enactments.
(vi) Social Accounting : This part of bookkeeping is otherwise called social detailing or social duty bookkeeping. It uncovers the social advantages made and the expenses caused by the endeavor. Social advantages incorporate such offices as therapeutic, lodging,
13 training, container, provident store, so on while the social expenses may incorporate such matters as additional hours worked by representatives without installment, condition contamination, irrational terminations, and so forth.
(vii) Human Resource Accounting : It is worried about the HR of an
venture. Bookkeeping techniques are connected to recognize HR and its development is done in cash terms with the goal that the general public may pass judgment on the complete work of the business endeavors including its non-human net resources. It is, along these lines, a bookkeeping for the general population of the association. Tragically no impartially evident measure has been produced for all inclusive application.
(viii) National Accounting implies the representing the country all in all. It is by and large