Functional accounting is a reporting format for financial results that clusters results based on the functions performed. This approach is most commonly used to cluster expenses by department, and is commonly used in larger organizations. For example, a company's expenses may be grouped together in the income statement as follows:
Accounting and finance department
Materials management department
Expenses are clustered together in this manner in order to track and evaluate the performance of individual departments. Thus, functional accounting is a form of responsibility accounting, since the manager of a department is responsible for the expenses charged to his department.
In order to report expenses by function, it is necessary to restructure the chart of accounts of a business. For example, a normal chart of accounts might have a single rent expense account, with a single account code assigned to it. In a functional accounting environment, there must be a separate rent expense designation for each department, so that rent can be allocated to each department. An example follows.
Rent expense - Accounting (#7600-100)
Rent expense - Engineering (#7600-200)
Rent expense - Materials management (#7600-300)
Rent expense - Production (#7600-400)
Rent expense - Sales (#7600-500)
The report writing software in the accounting system then accumulates all expenses based on the department codes in the chart of accounts and uses it to assemble an income statement that is based on functional activities.