What are the various functions of Accounting?
Various Functions of Accounting are:
- Recording: Accounting records business transactions
in terms of money. It is essentially concerned with ensuring
that all business transactions of financial nature are properly
recorded. Recording is done in journal, which is further
subdivided into subsidiary books from the point of view
of convenience.
- Classifying: Accounting also facilitates classification
of all business transactions recorded in journal. Items
of similar nature are classified under appropriate heads.
The work of classification is done in a book called the
ledger.
- Summarizing: Accounting summarizes the classified
information. It is done in a manner, which is useful to
the internal and external users. Internal users interested
in these informations are the persons who manage the business.
External users of information are the investors, creditors,
tax authorities, labor unions, trade associations, shareholders,
etc.
- Interpreting: It implies analyzing and interpreting
the financial data embodied in final accounts. Interpretation
of the data helps the management, outsiders and shareholders
in decision making.
Explain the different systems of accounting.
The following are the basic systems of recording business
transactions:
- Cash Basis Accounting: According to this system,
only actual cash receipts and payments are recorded in the
books. The credit transactions are not recorded at all,
till actual cash is received or paid. Thus, if purchases
are made in the year 2002 on credit and payment for purchases
is made in the year 2003, such purchases shall be considered
to be an expense of the year 2003 and shall not be recorded
in the year 2002. This system of accounting is mostly followed
by non-trading organizations, professionals like lawyers,
doctors, chartered accountants, etc.
- Mercantile or Accrual System: According to this
system, all the business transactions pertaining to the
specific period, whether of cash or credit nature, are recorded
in the books. This system of accounting is based on accrual
concept, which states that revenue is recognized when it
is earned and expense is recognized when obligation of payment
arises. Actual movement of cash is irrelevant. Mercantile
system of accounting is widely followed by the industrial
and commercial undertakings because it takes into account
the effects of all transactions already entered into.
- Mixed System: Mixed system is modified form of
pure-cash-basis accounting. Because of the fact that pure
cash basis would result in balance sheet and income statement
with limited use, it necessitates the need of mixed accounting
in which some items (especially sales and period costs are
treated on cash basis and some items (especially product
costs and long-lived assets) are treated on accrual basis.
Pure cash basis approach would change the cost of acquisition
of inventories from the profit of that year in which the acquisition
costs are paid rather than in the year in which inventories
are sold. Similarly cost of acquisition of fixed assets would
reduce the profits when paid in cash rather than in later
periods when these long-lived items are used, thus misleading
the results of financial operation. |