8 Functions of Accounting

One of the prime functions of accounting is to provide management with financial information and guidance — presented in understandable financial statements and records. This information and guidance should summarize, eflectivelv, ( 1 ) the past operations of a business for, say, a month, three months, six months, or a year, as the case may be, and (2) tlie financial condilion of a business;

.Today, more than ever before, the ability of a business to earn a net profit and  the financial interests of its ow’ners and creditors depends upon efficient business administration. In support of these objectives, the information provided by a properly designed and operated system of accounting is of fundamental importance. It is through the medium of accounting reports that managements may appraise the performance of those upon whom responsibility has been placed. It is through accounting reports that managements may control operating efficiency and financial solvency. And it is through accounting reports that plans may be made for the improvement of future operations.

Accounting, so utilized, is constructive. It is constructive because it provides means for certain effective manapment controls: control of finances and control of costs through planning procedures, effectively administered. Indeed, the financial state- ments of private business have become so important that, without them,

the machinery of investment, credit, and taxation would almost certainly be fatally impaired.Conversely, it is through accounting reports that managements them- selves may be appraised by the owners who have delegated the functions and responsibilities of management. In these days of large-scale business, of the widespread use of the corporate form of business organization, and of scattered and absentee ownership, the stewardship of management is of conspicuous importance. This is but to say that intelligent investment is primarily and fundamentally dependent upon the essential information provided by the financial statements of accounting.

The management of a business — from the owner-manager of a small business to the management of a large corporation — is interested in the following kinds of primary information:

1. What properties are owned.

2. What debts are owed.

3. What the business is worth in terms of invested capital.

4. What the net income of a business has been for a specified period of time.

5. How the net income of the business was earned.

That this information is important to management should be manifest. It is information which is, and must be, contained in the records of a busi- ness. These records are reservoirs of needed information — needed because the information is essential to good business management. A businessman must know where his business stands today and what it has done in the past if he is to formulate managerial programs which promise to be sound and profitable for the future. His plans and decisions depend rather sub- stantially upon the production of periodic financial statements — primarily the balance sheet and the statement of income — based upon adequate records. These accounting records are indispensable to the continued sound- ness and profitability of any business, be it large or small. When the accounting records of a business are accurate and adequate they are, in and of themselves, primary indicia of good management.

Finally, the establishment or proof of business facts is essentially a matter of records. In the event of fire or other catastrophe, the lack of ade- quate records — as well as the lack of protection for these records — may make the resumption of business operations costly, difficult, and sometimes even impossible.

The five kinds of primary information described above have other facets of contributory importance:

1. Where more than one owner is interested in the net income of a business, the net income of that business must be accurately determined before this income can be fairly apportioned and before, also, the indi- vidual and collective interests of these owners can be fairly established.

2. Where income tax returns must be prepared and substantiated, accurate and detailed accounting information is essential. This is pri- marily a matter of records.

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