4. Role of Accounting

Roles of Accounting

The keywords here are identifying measuring recording and communicating. Let us study this in a little bit of detail

1. Identifying relevant transactions

Depending on the size of the business and hundreds of transactions can take place in a single day. Not everything can be recorded in the books of account. For all these transactions the accountant has to identify those transactions which are related to the business which are monetary in nature and which will come in our books of accounts

Example: Suppose Harsh Buys a refrigerator for a home for Rs.50,000. Which is a Business Transaction.

2. Measurement

Let us take a scenario where are trader trading in stationery items is selling the items within India and is also exporting some of his items to a dealer in China. What will be the common unit what will be the measuring unit will it be rupees will it be Paisa over let be a dollar a single unit common for all transactions has to be taken into account which is not to be changed every year.

3. Recording

This is the basic (First) function of accounting for all business transactions all monetary (related to money) business transactions such as

Eg. sales purchases salaries and electricity are recorded or accounted in the books of account.

The recording is done in a book called journal which will study more in the coming chapters.

After the Accountant has recorded data the data has to be classified in a systematic manner,

similar accounts are grouped and placed in one place called a book called ledger this is the second step of recording

from journal we record the transactions all the transactions falling under the same head in an account called ledger which will study ahead in the coming chapters.

4. Communication

After the accounts has been recorded and measured analyzed the job of an accountant does it complete at this point. 

Communication is concerned with transmitting the information to the end-users of financial statements so they can prepare to make decisions on the basis of books of accounts.

Why do the accountants need to communicate the results of the books of account or communicate the results of the books of accounts to the uses of financial statements who are these uses of financial statements let us understand?

There can be two kinds of uses of two financial statements. External users and internal users. People who are on the payroll (on salary) of the company are called internal uses to financial statements.

Internal users

If the company is growing, the employee’s growth is certain. The CEO the CFO vice president managers plant manager's there all internal to the organization and hence internal uses of the organization

External users

A business cannot function alone there are banks who give loans to the businesses there are creditors who give the gift credit to the businesses there is the government who keeps an eye if they are papering a taxes correctly or not the customer buys are products because he trusts us all these people are external to the organization they are dealing with the organization from the outside and external uses of financial information

Users                                                                                      Why do they need information?

Investors                                                                                 return on money invested in the business

Unions and employee groups                                                 Stability in Income, Bonus (Out of   profits)

Lenders and Banks                                                                 Credibility of the company

Creditor’s                                                                                Continuous supply of products

Government and related Organisations                                  Complaisance and payments of dues

Social Groups                                                                          Impact on the environment

Other fields of accounting                                                                 

Financial accounting refers to the preparation and interpretation of financial information and communication to the users of accounts. This is what we have understood above accounting is the basic sense

Management accounting refers to internal reporting to the management of the business. Management accountant is a very important component that helps the management make important decisions regarding the business operations

Cost accounting

Cost accountants are usually hired by companies that are dealing with manufacturing products. For any manufacturer cost of the product manufactured by him is the most important factor which decides his profits

All this tells you about the person or the data but not that they mention any quantity or numbers

Accounting has certain qualitative characteristics let us understand what qualitative characteristics are.

Accounting data should be recorded in such a way that it is very easy and understandable and useful to the person who uses that data. 

For example, if I just randomly right 10 numbers it will not make any sense

But let’s say that these 10 numbers are the marks of the students in your class then it would make sense