Purpose And Functions Of Accounting

Category: Accounting, Tax
Last Updated: 16 Apr 2021
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Accounting has been around since the beginning of civilisation. Accountancy participated in the development of metropolis, trade, and the constructs of wealth and numbers. The importance of accounting can non be overemphasized. Equally of import are the criterions used to guild the application of accounting pattern. Without rules and criterions, fiscal coverage would non reasonably present the fiscal place of a company. Accounting has changed and evolved immensely over clip and continues to alter.

In this assignment, I will specify accounting and the different procedures of accounting records. I will besides Distinguish between Financial Accounting and Management Accounting and sketch the advantages and disadvantages, with illustrations.

The beginning of civilisation occurred during the passage from hunter-gatherer to farmer. Farming led to harvest excess and hence the demand to merchandise and barter. A Jericho, the oldest metropolis known to historiographers was the first known trading centre for excess goods. Personal wealth created the demand to maintain path of stock lists. Ancient bookkeepers used little clay balls called items to number and maintain path of bing wealth. These items were used as grounds of minutess. Over clip, the items were used to do feelings in clay along with images which represented the first efforts at accounting. These events took topographic point around 5000 B.C. ( Giroux )

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Evidence suggests that dual entry clerking developed in Italy around 1200 B.C. The first book written on dual entry clerking was written by Luca Pacioli in 1494. ( Smith ) Pacioli was referred to as the male parent of accounting, but he did non really contrive the system he described. He merely wrote about the concern patterns used by merchandisers in Venice at the clip. Many of his Hagiographas were used for several centuries. With the development of engineering, wealth, and trade came the demand to adequately account for the complexness involved.

What is Accounting?

Accounting a subdivision of Accountancy. It is a service activity. Its map is to supply information, A chiefly fiscal in nature, about economic entities that is expected to be utile in doing economic determinations, in doing sound picks among alternate classs of action. Accounting, is frequently called `` The linguistic communication of Business '' A statement of basic accounting theory defines accounting as the procedure of identifying, mensurating and pass oning economic information to license informed judgement and determination by users of the information. ( Evanson, Illinois: American Accounting Association,1966 ).

Accounting is the art of recording, sum uping, describing and analysing fiscal minutess. That is the systematical record of twenty-four hours to twenty-four hours events to cognize about net income, assets and liabilities. Accounting is about answerability. Most organisations are externally accountable. In some manner for their actions and activities. They will bring forth studies on their activities that will reflect their aims and accomplishments to people to whom they are accountable.

Purpose and Functions of Accounting

  • To supply quantitative, fiscal information about economic entities to statement users so that they could do informed judgement and better decision.

 Users of Accounting Information

Accounting is an information system that measures concern activities, processes information into studies and communicates the studies to determination shapers. A cardinal merchandise of this information system is a set of fiscal statements-the paperss that report fiscal information about agreeableness to determination shapers. These studies tell us how good an entity is executing in footings ofA net incomes and losingss and where it stands in fiscal footings.

We have two types of users of accounting. That is internal users and external users. Some illustrations of users of accounting are as follows:

They use accounting figures to

  • Suppliers - decide if they can give recognition installations to the house, when providing stuffs
  • Creditors - Short term ; find if the sum due by the house will be paid on clip and if more money can be given on recognition.
  • Long term- determine if capital and involvement will be paid in due clip
  • Bank and Financial Institutions will used accounting figures to make up one's mind on overdraft, loan or rental installations.
  • Contractors-decide whether they will go on to work for the house and the possibility of more plants if the company is spread outing.
  • Government - will make up one's mind on allotment of resources. If the activities have to be regulated and besides determine revenue enhancement policies.
  • Customers - maintain themselves update about the company. That is if the house is traveling on good figures, they react to market demands. For case they might will develop new merchandises.
  • Investors - to judge chances on their investing and make up one's mind what to make with their portions. That is selling them if he feels that the monetary value of his portion might fall due to hapless public presentation of the house, retain or purchase more if the stockholder feels that the company will go on to turn
  • Potential investors - to make up one's mind if buying portions of that house will be fruitful or non

Management reappraisal:

  • Short term solvency
  • Long term solvency
  • Activity ( effectual use )
  • Profitableness in relation to turnover
  • Profitableness on investing

Employees - to cognize the strength and prosperity of the company. To measure the capacity to pay wage, retirement benefits and employment chances.

  • Tax Governments: measure the revenue enhancement liabilities of the endeavor
  • Populace: find how the company will impact the vicinity, for case employment, local providers, tendencies or developments as per Corporate Social Responsibility.

Branches of Accounting

General Accounting or Financial Accounting

It is concerned with the entering of minutes for a concern or other economic unit and the periodic readying ofA statements from these records.


Is a service pattern who examines records, statements and show an sentiment sing their equity of histories.

  • Cost Accounting emphasizes the finding and the control of costs peculiarly the costs of fabrication procedures and of the manufactured merchandises.
  • Management Accounting is concerned with the application of appropriate techniques and constructs in treating the historical and jutting economic information of an entity, to help direction in putting up sensible economic aims and in doing rational determinations towards the attainment of these aims.
  • Tax Accounting includes the readying of revenue enhancement returns and the consideration of the revenue enhancement effects of proposed concern minutes.
  • Accounting Systems is concerned with the creative activity of accounting and office process for the accretion and the coverage of fiscal information.
  • Budgetary Accounting represents the program of fiscal operations for a period and through histories and sum-ups, provides comparings of existent operations with the preset program
  • Government Accounting specializes in the minutes of political units with respects to the concern facet of public disposal. It chiefly focuses on the proper detention of authorities finances and their intents.
  • Accounting Education is possibly the most obvious field of specialisation. In add-on to learning, many accounting professors engage in auditing, revenue enhancement accounting or other countries of accounting.
  • Internal Auditing trades with finding the operational efficiency of the company sing protection of the company 's assets, truth and dependability of the accounting information, and attachment to order managerial policies.
  • International Accounting include particular accounting for international minutes, comparings of accounting rules in different states, and harmonisation of diverse accounting criterions worldwide and revenue enhancement demands of all the states in which the company does concern.
  • Not-for-profit Accounting trades with particular accounting for charitable organisations, A spiritual groups, governmental bureaus, schools and co-ops etc

Though we have different subdivisions of accounting the two chief signifiers of accounting information are fiscal accounting and managerial accounting. We will discourse about these two subdivisions of accounting in the 2nd portion of this assignment.

Basics of Accounting

Accounting is based on maintaining records on sound accounting rules which are as follows:

  • Systematic categorization and recordings in books of histories
  • Book- maintaining ( entering of events and minutess )
  • Sum uping the records - test balance, ledger, net income and loss and balance sheet
  • Interpreting the fiscal minutes

Primary aims of Accounting

The primary aims are:

  • Maintain Accounting records
  • Calculate the consequences of operations
  • Determine the fiscal place
  • Communicate the information to users

About all companies create end-of-year fiscal studies, and a new set of books is begun each twelvemonth. Depending on the nature of the company and its size, fiscal studies can be prepared at much more frequent ( even daily ) intervals.

Procedures of accounting records

The procedures of accounting records are:

  • Identifying
  • Measuring
  • Recording
  • Classifying
  • Sum uping
  • Analyzing
  • Interpreting
  • Communicate the fiscal minutes and events

The map of these procedures is to keep orderly records to set up fiscal public presentation and fiscal state of affairs, and to pass on the accounting information to the concerned parties to which the company is accountable. First traffics are identified and their needed papers are collected. That is designation of minutes and economic events of a specific organic structure. It involves choosing the activities related to a Firm. Bills from providers or payment made to creditors are illustrations of economic events. In accounting every recorded dealing of the company needs to be measured in a common unit for case the state 's local currency. In Mauritius, many houses trades with abroad companies. However they have to utilize a unvarying pecuniary unit when mensurating minutes. Dealings are recorded to supply a history of the organisation 's fiscal activities. That is maintaining systematic record in proper books of histories. Recording is done on a regular basis and it enables the company to place all the traffics of the house.

After minutes are recorded in history books, they are posted to the appropriate histories. That is rent in rents account, gross revenues in gross revenues account. Classifying is the analysis of concern minutess of similar nature. After the above processes the information found in fiscal statements are analyzed make decisions about the profitableness and fiscal places of the concern. It will so decently presented harmonizing to Accounting Torahs ( Trial balance, trading and profit-and-loss history and balance sheet ) to do it apprehensible to internal and external users of the fiscal information. The trading and profit-and-loss history and balance sheet are analyzed to pull decisions on the fiscal strengths or the failings of the house. It besides helps to determind growing or lessening in gross revenues. These are achieved by ciphering assorted ratios and per centums or by using other techniques. The information is used for fixing the hereafter aims and methods for achieving such aims. The accounting information is so communicated users or individual concerned. This is made by administering to the users the fiscal studies. It includes income statement, balance sheet and other extra information in the signifier of accounting ratios, graphs, diagrams etc. The consequences of analysis and reading must be communicated to the parties who are to do determinations or signifier judgements so that appropriate determinations may be taken at the right clip

What is fiscal accounting and Managerial Accounting

Though we have different subdivisions of accounting the two chief signifiers of accounting information are fiscal accounting and managerial accounting. Talk of accounting, we besides need to advert Tax accounting. As the name itself, revenue enhancement accounting focuses on revenue enhancement issues. It provides revenue enhancement information to revenue enhancement governments. Financial and direction accounting are both of import tools for a concern, but serve different intents. A concern uses accounting to find operational programs in the hereafter, to reexamine past public presentation and to look into current concern maps. Management and fiscal accounting have different users, as investors are non normally involved in the daily operations of the concern but are concerned about their investing, whereas directors need information rapidly to do day-to-day concern determinations.

Fiscal accounting is used to show the fiscal wellness of an organisation to its external stakeholders. Board of managers, shareholders, fiscal establishments and other investors are the audience for fiscal accounting studies. Fiscal accounting nowadays a specific period of clip in the past and enables the users to see how the company has performed. Fiscal accounting studies must be filed on an one-year footing, and for publicly traded companies, the one-year study must be made portion of the populace record

Fiscal Accounting is concerned with classifying, mensurating and entering the minutes of a concern. It is geared towards external users of accounting information. Fiscal accounting provides information that would be helpful in pulling capital. It shows the fiscal place of a concern at a peculiar point in clip and shows how a concern has performed over a specific period. The three chief fiscal statements that help to accomplish this purpose are the Profit & A ; Loss history, the Balance sheet and the Cash Flow Statement.

On the other manus, direction accounting is a system designed unambiguously for the company direction squad. It provides current and accurate information to directors of the company to do determinations refering the daily operations of a concern. It is non based on past public presentation, but on current and future tendencies. Because directors frequently have to do operation determinations in a short period of clip in a fluctuating environment, direction accounting relies chiefly on prediction of markets and tendencies. The information is used for planning of future ends of the company. It besides helps to measure internal public presentation of the company.

Differences Between Financial And Managerial Accounting

The users of Financial accounting is chiefly external individuals as it describes the whole administration. For illustration stockholders, creditors, Banks and other fiscal establishments. A direction accounting system produces information that covers portion of the organisation or a specific section that is used within an organisation, by directors and employees for determination devising.

  • Fiscal histories are supposed to be in specific format. This will simplify affairs when seeking to compare histories of different companies. On other manus there is no particular format for managerial accounting.
  • Fiscal accounting helps in doing investing determination but Management Accounting helps directors to enter, program and control activities.
  • Fiscal accounting focal points on history where as direction accounting focal points on past and existent public presentations every bit good as future.
  • Fiscal histories are prepared by comptrollers but managerial accounting is prepared by officers of different sections. They coordinate information and bring forth direction histories.
  • Fiscal histories are for a particular and good defined period. For illustration yearly or semi yearly for big companies. However direction histories can be prepared whenever it is needed. It can be daily, hebdomadal or monthly.
  • Fixing fiscal studies is compulsory for limited companies. It has to be filed with competent governments while there are no legal demands to fix studies on managerial accounting.
  • Fiscal histories are largely concerned with pecuniary points but managerial histories can be both pecuniary and non pecuniary points. For illustration stock counts or end product.

Aims of Financial Accounting Versus Managerial Aims

The chief aim of fiscal accounting is to unwrap the concluding consequence of the house and place fiscal status of the concern on a peculiar day of the month. On the other manus the chief aim of managerial accounting is to assist direction by supplying to them information which they use to be after, measure and command the concern.

Advantages And Disadvantages of Financial Accounting

Among the most important advantages of fiscal accounting is the information it reveals about a concern. This information is utile to non merely leaders who use information about gross, disbursals, assets and equity to do determinations for the hereafter, but besides to investors who examine the consequences of fiscal accounting, known as fiscal statements, to make up one's mind which concerns to put in. Financial accounting allows concern leaders to change their budgets and programs for the hereafter to turn to new fiscal jobs or take advantage of the fiscal strengths that accounting reveals to turn or derive competitory advantages within an industry. Government ordinances require concerns to execute fiscal accounting, which means that the procedures has the added advantage of maintaining a concern in line with regulative bureaus and free from mulcts or disciplinary action. Financial accounting information is an component of transparence and concern moralss, necessitating honest and accurate information for investors, rivals and market analysts to reexamine. Businesss besides need information from fiscal accounting, such as net incomes after disbursals and the value of tax-deductible disbursement, to finish their one-year concern income revenue enhancement returns.

Fiscal accounting is an expensive portion of making concern, particularly for big concerns. For a little concern, proprietors need to give clip to accounting, which takes off from the clip they can pass working with employees or giving their endowments to the concern ' merchandises and services straight. Large concerns employ accounting sections that consist of specializers who earn professional wages and necessitate benefits, offices and equipment to execute their occupations. This means that a concern demands to utilize the information it additions from fiscal accounting to its ain fiscal benefit or hazard losing money in the procedure. Fiscal accounting besides can present disadvantages to a concern by interrupting the timing of its operations. This is peculiarly true when a concern chooses the incorrect type of accounting for its activities, or fails to update its accounting methods to maintain gait with its growing. For illustration, hard currency method accounting merely enters minutes once they are completed, which works good for little concerns but can non account for the outstanding payments and histories receivable that a big concern is likely to hold. A big concern that use hard currency method accounting alternatively of accrual method accounting hazards losing path of major constituents of its fiscal image, while a little concern that employs the accrual method takes on unneeded complication and disbursal.

Advantages of Management Accounting

Since it is focused on doing future determinations with the aid of past fiscal information, it is frontward looking and hence progressive in nature. Managerial histories are meant for internal users like direction and therefore it is non necessary that it is made by following rigorous guidelines which is the instance with fiscal accounting. It is flexible in nature and therefore it can be prepared anytime and they are non required to be made annually they can be made monthly or on hebdomadal footing. Management accounting takes all the information and so show it in such a manner that a proper analysis about the feasibleness and profitableness of any concern determination can be made.

Disadvantages of Management accounting

It is dependent on cost accounting and fiscal histories and therefore the truth of it is besides dependent on how accurate that information is. This it is one of the restrictions every bit far as its serviceability is concerned. It can besides be affected by the prejudice of top direction and therefore it is likely that they may be pulled in such a manner so as to profit themselves instead than stockholders. Since it does non follow accounting rules, it can non be compared with other companies studies and therefore accurate rating about the direction may non be possible on the footing of direction accounting.


As we can clearly see accounting is really of import in every facets of life and corporate lives. Without accounting it will non be possible to acquire exact figures to analyze, comparison or even better. Accounting is based on several rules and ways to treat accounting information. These accounting procedures are a concatenation of undertakings that needs to be done and respected during the accounting twelvemonth to acquire accurate and coveted consequences.

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Purpose And Functions Of Accounting. (2017, Jul 12). Retrieved from https://phdessay.com/purpose-and-functions-of-accounting-accounting-essay/

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