7 Important Functions of Accounting

Functions of Accounting

             Accounting is one of the basic and inseparable activity in business. The functions of accounting are simple and complex yet in helps us in communicating various  important things. Now let us understand the functions of accounting which are 

§  Identifying

§  Recording

§  Classifying

§  Summarizing

§  Analyzing

§  Interpretation

§  Communicating

§  Identifying:

              This is the basic function in accounting.  It is necessarily requires all the business transactions are to be recorded but also in a systematic manner.  Recording of transaction take place in journals and ledgers or subsidiary books of accounts. The numbers of subsidiary books maintained are based on the nature and size of the business.

§  Classifying:

            It is mainly concern with the systematic analysis of recorded facts in order to group the transactions based on the nature into respective ledger. The ledger contains different pages of the heads under which all financial transactions of similar nature are collected.  The ledger account will help to know total expenditure under varies heads for given period. This helps to present data for further process in systematic manner.

§  Summarizing: 

                 The data here is presenting is classified in the manner which is understandable and useful to the internal as well as external end users of the financial statements. This process involves preparation of Trial Balance, Income Statement or Profit and Loss a/c and Balance sheet.

§  Analyzing:  

               It establishes the relationship between the items of P&L A/c and Balance Sheet. The rationale for analyzing is to identify the financial strength and weakness of the business as well as financial condition of the business.  It provides basis for the interpretation of financial statements.

§  Interpreting: 

           It is the final function of accounting in the process of preparing financial statements. The recorded financial data is interpreted in the manner that the end user can make meaning judgment about the financial position, profitability at the business operation. The financial data is prepared is helpful in preparing the future plans and framing of policies for executing such plans.

Communicating:

              It concerned with the transmission of summarized analyzed and interpret information to the user and facilitate them in making informed judgment.  It is preceded by the accounting cycle through which identification and measure the transaction and events passed. Accounting also functions as a language for communication by communicating the financial position, profitability by using financial statements so then the user can make informed decisions.  
            
                   Thus each and every function of accounting is important from accounting point of view. Hope so now you have understood the functions of accounting and also understood the importance of functions of accounting.