We explored whether emotion understanding promotes positive social functioning in childhood using the ability emotional intelligence (AEI) framework, which defines emotion understanding more broadly than is common in developmental science. The prospective study included children ages 9–11 years who completed a measure of AEI at the start of the school year, and whose playground interactions were observed for one full year. Findings showed that, among girls, low AEI was associated with higher levels of direct aggressive behaviour in the playground; boys and girls high or low in AEI were more likely than their peers to watch others during playground social interactions. Further, higher AEI was associated with indirect aggression in school, suggesting higher AEI during childhood may be associated with the developmental transition from direct to indirect forms of aggression. The implications of the findings for school practice in relation to the teaching of emotion understanding are discussed.