Functions of Accounting | M3 | Lecture - 4

The functions of accounting can be broadly classified into two categories: Financial Accounting and Management Accounting.

Financial Accounting:

The primary function of financial accounting is to record, classify, and summarize financial transactions and prepare financial statements for external stakeholders. The functions of financial accounting include:

• Recording Transactions:

This involves the systematic and organized recording of all financial transactions in a journal, ledger, or other accounting tools.

• Classifying Transactions:

Once the transactions are recorded, they are classified into different categories, such as revenue, expenses, assets, liabilities, and equity.

• Summarizing Transactions:

The transactions are then summarized into financial statements, such as the balance sheet, income statement, and cash flow statement.

• Providing Financial Information:

The financial statements provide useful information to external stakeholders, such as investors, creditors, regulators, and the general public, about the company's financial position, performance, and operations.

Management Accounting:

The primary function of management accounting is to provide information to internal stakeholders, such as management, to aid decision-making, planning, and control. The functions of management accounting include:

• Budgeting:

Management accounting involves the preparation of budgets and financial forecasts, which are used to plan and control operations.

• Cost Analysis:

Management accounting provides cost analysis, which helps management to determine the cost of production, product pricing, and profitability.

• Performance Measurement:

Management accounting provides tools for measuring and evaluating the performance of the company, such as Key Performance Indicators (KPIs).

• Strategic Planning:

Management accounting helps management to make strategic decisions about the future direction of the company, such as investments, mergers, and acquisitions.

In summary, the functions of accounting are to record, classify, and summarize financial transactions, prepare financial statements for external stakeholders, provide information to internal stakeholders to aid decision-making, planning, and control, and help management to make strategic decisions about the future direction of the company. Accounting plays a critical role in the success of any organization, providing the necessary information for effective decision-making and strategic planning.

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