Page 10 - DCOM101_FINANCIAL_ACCOUNTING_I

Financial Accounting-I

Notes 1.4 Functions of Accounting

The main function of accounting is to record the business transactions scientifi cally and
systematically. Apart from this, there are other functions of accounting which are as follows.
1. It depicts the true and fair picture of the financial position of the company.

2. It helps in ascertaining profit or loss of the business which is the only primary aim of the
business.
3. It helps in future decision-making by different persons interested in such accounting
information.
4. It depicts the earning capacity of the business.
5. It satisfies all Government rules and regulations connected with Accounting information

such as all the companies are required to prepare their statements as per requirements of
the Indian companies Act, 1956, amended upto date.

1.5 Users of Accounting Informations

There are two types of persons interested in financial statements: (1) Internal users, and

(2) External users.
1. Internal Users: These are: (a) Shareholders, (b) Management, and (c) Trade unions
employees etc.
(a) Shareholders are interested to know the welfare of the business. They can know the
operational results through such financial statements and the financial position of

the business.
(b) Management is interested to take important decisions relating to fixing up the selling

prices and making future policies.
(c) Trade unions and employees are interested to know the operational results because their

bonus etc. is dependent on the profit earned by the business. Financial statements
also help in their negotiations for wages/salaries.
2. External Users: The following are most important external users of fi nancial statements:

(a) Investors: They are interested to know the earning capacity of business which can be

known through financial statements. They can also know the financial soundness of

the business through fi nancial statements.
(b) Creditors, Lenders of Money etc: The creditors and lenders of money etc. can also know

the financial soundness through financial statement. They have to see two things (i)

Regularity of income and (ii) solvency of the business so that their investment is risk
free.
(c) Government: Government is interested to formulate laws to regulate business activities
and also law relating to taxation etc. Financial statements help while computing
National Income statistics etc.

(d) Taxation authorities: Financial statements provide information relating to operational
results as well as financial position of the business. Tax authorities decide the amount

of tax as per financial statement. It is very useful to other taxation authorities such as

sales tax etc.
(e) Stock Exchanges are meant for dealing in share/securities. Purchase and sale of such
shares and securities are possible through stock exchanges which provide fi nancial
information about each company which is listed with them.

4 LOVELY PROFESSIONAL UNIVERSITY