The information is gathered from source documents, recorded first in journals then posted to ledgers, either manually or with accounting software. Usually, management accountants are well-versed in the running of a company and are therefore better suited to provide advice to owners. Of course, accounting software has replaced physical journals in most businesses, but the programs use the same basic accounting journals to keep track of finances. By anticipating the potential fluctuations of currency, it can help businesses plan for future ramping up of business, expansion of production facilities or investment opportunities. Materiality: The notion of materiality states that a standard of accounting can be ignored, as long as the net result of doing so will have a small enough impact on the books that no one reviewing them would be misled. The second golden rule of accounting, used for what is called real accounts, dictates that you always debit what comes in and credit what goes out. Overview of the Functions of Accounting The three major functions of accounting are: The collection and storage of data concerning a business’s financial activities. In this way, companies can plan for expenses that crop up in the future. Accounting Theories have developed through observation, analysis, explanation, scrutiny and scanning of the day-to-day accounting practices. Create your own unique website with customizable templates. There are several principles considered part of basic accounting theory, including cost principle, matching principle, materiality, conservatism and monetary unit assumption. Materiality changes depending on the size of the company in question, too, since smaller budgets require that more attention is paid to each amount spent, as it represents a larger portion of the whole. For instance, if your company has a salesperson who earns $2,000 in commissions for work done in January, the expense for this should be recorded in January, even if you do not pay the employee until the next month. Thus, Accounting is to "assist management in establishing a plan for reasonable economic objectives and in making of rational decisions"-Haynes and Massic, Management Analysis Accounting is an essential aspect of a business. However, they should still be documented when you acquire them. The Securities and Exchange Commission suggests that a line item that represents less than 5 percent of a budget need not be accounted for, but that anything over that amount should be. Careful judgment must be exercised when determining whether a specific transaction is important enough since materiality does not outline specifically which transactions are deemed most impactful. In every case, transactions should be documented immediately, along with their date, a description and the account that will be both debited and credited. These include assets, liabilities, owner’s equity, revenue, cost of goods sold, operating expenses and other accounts. This theory exists only in the accrual method of accounting. Accounting theory, as regulatory standards evolve, also helps develop new accounting practices and procedures. • Understand what measurement is and its role in accounting. The functions of accounting facilitate the objectives of accounting. It is therefore, difficult to discuss one area without relating to other areas of knowledge. Both types of accountants must follow the same golden rules of accounting and, if working for the same company, adhere to the same principles of accounting for the sake of consistency. These can range from things as simple as office supplies and factory equipment to new franchises. Lastly, when it comes to nominal accounts, you must debit all expenses and losses and credit all incomes and gains. there are many objectives of accounting. Monetary unit assumption: This high-level accounting principle is appropriate for large or global companies. For instance, if your business sold products for $5,000, in accrual-basis accounting, the accountant would record the transaction in the revenue (credit) category and accounts receivable (debit) for the same amount. Accounting theory is more qualitative than quantitative, in … A real account, by definition, has a monetary value and is the property of the business. • Gain insight into the principal valuation systems in accounting. Accounting is an advisory service function and is concerned with furnishing such information to the management as will facilitate efficient planning, operational control and coordination of future activities of the enterprise. Under the matching principle theory, expenses are always reported in the same period, such as a month, quarter or year, and the associated income is recorded.