Functions of Accounting
Accounting performs several important functions in a business organization. These functions help businesses maintain records, measure performance, protect assets, and make better decisions. Accounting acts as the information system of a business, providing useful financial data to different users.
(1) Maintaining Complete and Systematic Records
One of the primary functions of accounting is to maintain complete and systematic records of all business transactions.
All financial transactions are recorded according to accounting rules, principles, and standards. This ensures that records are accurate, organized, and easy to understand.
These records are maintained through books like:
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Journal
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Ledger
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Subsidiary Books
Maintaining proper records helps avoid errors, fraud, and confusion.
Real Life Example
Imagine a grocery store owner who records every purchase and sale daily. If he maintains systematic accounting records, he can easily check how much stock was purchased, how much was sold, and how much profit he earned.
(2) Preparation of Financial Statements
Another important function of accounting is the preparation of financial statements.
Financial statements mainly include:
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Profit and Loss Account
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Balance Sheet
The Profit and Loss Account shows whether the business has earned profit or incurred loss during the accounting period.
The Balance Sheet shows the financial position of the business at the end of the accounting year, including assets, liabilities, and capital.
Real Life Example
A company prepares its financial statements at the end of the year to understand its financial performance. Investors and banks also review these statements before making financial decisions.
(3) Communicating the Financial Results to Various Parties
Accounting also helps in communicating financial information to interested parties.
These parties include:
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Owners
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Investors
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Creditors
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Banks
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Government authorities
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Employees
Accounting reports provide information about profit, loss, assets, liabilities, and financial performance of the business.
Real Life Example
Before investing in a company, investors study its financial statements to check whether the business is profitable and financially stable.
(4) Protecting the Assets of Business
Another important function of accounting is protecting the assets of the business.
Accounting maintains proper records of assets such as:
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Cash in hand
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Bank balance
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Inventory (stock)
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Debtors
This helps management maintain proper control over business resources and prevents misuse or loss.
Real Life Example
If a company keeps proper records of inventory, it becomes easier to detect theft, damage, or wastage of goods.
(5) Providing Assistance to Management
Accounting provides useful financial information to management, which helps in planning, controlling, and decision-making.
Management uses accounting information to:
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Plan future activities
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Control business expenses
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Make strategic decisions
Real Life Example
If accounting reports show that production costs are increasing, management may decide to change suppliers or reduce unnecessary expenses.
(6) Trusteeship
In companies, the management is responsible for controlling and managing the resources of the business on behalf of the owners or shareholders.
Accounting helps management act as a trustee of the company’s funds and resources by maintaining transparent and reliable financial records.
Real Life Example
Shareholders invest money in a company, and accounting records ensure that management uses these funds responsibly.
(7) Compliance of Legal Needs
Businesses must follow various laws and regulations such as:
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Companies Act
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Income Tax Act
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Goods and Services Tax (GST) Act
Accounting helps businesses prepare reports and statements required by government authorities.
These may include:
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Annual accounts
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Income tax returns
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GST returns
Real Life Example
A business uses accounting records to calculate its taxable income and file its income tax return with the government.
Goods & Services Tax (GST)
Previously, there were several indirect taxes such as:
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Excise Duty
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Sales Tax
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VAT
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Service Tax
These taxes have now been merged into a single tax system called GST (Goods and Services Tax).
GST is collected at the time of sale of goods or services and paid to the government.
Real Life Example
When you purchase a mobile phone or restaurant food, GST is included in the bill, and the seller deposits that tax with the government.
(8) Fixing Responsibility
Accounting also helps in fixing responsibility for the performance of different departments or managers in an organization.
By analyzing accounting records, management can evaluate the efficiency and profitability of each department.
Real Life Example
If the sales department generates high revenue but the production department has high costs, accounting helps management identify which department needs improvement.
✅ In Simple Words
The main functions of accounting are:
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Maintaining systematic records
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Preparing financial statements
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Communicating financial information
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Protecting business assets
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Helping management in decision-making
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Ensuring proper use of company resources
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Meeting legal requirements
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Fixing responsibility of departments