Financial Accounting covers the preparation and interpretation of financial statements and communication of accounting information to the external users of accounts. Financial Accounting has a single unified structure. It means, the information relating to the operations of various enterprises is presented on more or less uniform basis. It may be recalled that the end products of financial accounting are the three Financial statement: I. Balance sheet, ii Profit and loss account, iii) Statements of changes in financial position.
The Balance sheet reports the financial position of a business at a particular point of time. The results of operation over a specified period of time are contained in the Profit and Loss account. The statement of changes in financial position reports the inflow and outflow of financial resources during a given period of time
Definition
Financial Accounting is the art of recording, classifying and summarising in a significant manner in terms of money transactions and events which are in part, at least of a financial character and interpreting the results thereat." (-American Institute of Certified Public Accountants)
Functions of Accounting
Important functions of accounting are:
1. Systematic record of business transactions.
To keep systematic record of business transactions, post them to the ledger and ultimately to prepare the final accounts is the first main function of accounting. 2. Protecting the property of the business. –
For performing this function the accountant is required to devise such a system of recording information so that assets of the business are not put to wrong use and a complete record of the assets of the concern is available without any difficulty.
3. Communicating results to interested parties.
This function requires to supply the meaningful information about the financial activities of the business to the various parties i.e. owners, creditors, investors, employees, government, public, research scholars and the managers at the right time. 4. Compliance with legal requirements. The accounting system must be such which may be able to comply with the legal requirements. Under various enactments a businessman is required to file various statements e.g. income tax return, return for sale tax purposes etc. 5. Stewardship. In case of companies, the management is entrusted with the resources of the enterprise. The managers are expected to act as true trustee of the funds and accounting helps them to achieve the same. 6. Assistance to Management. Accounting assist the management in planning, evaluation of performance, control and decision making by providing required information. 7. Fixing Responsibility. Accounting helps in determination profitability of different departments of the enterprise and ultimately helps in fixing the responsibility of departmental heads. OBJECTIVES OF ACCOUNTING
The followings are some of fundamental objectives of accounting:
1. To keep systematic records: Accounting is done to keep a systematic record of financial
transactions. In the absence of accounting, there would have been terrific burden on human memory, which in most cases would have been impossible to bear.
2. To protect and control business properties: Accounting provides protection to business
properties from unjustified and unwarranted use.
3. To ascertain the operational profit or loss: Accounting helps in ascertaining the net profit earned or loss suffered on account of carrying the business. This is done by keeping a Proper record of the revenue and expenses of particular period.
4. To ascertain the causes resulting into profits earned or losses suffered: Accounting Helps in knowing the exact reasons leading to net profits and a net loss suffered. It highlight the areas of strengths or weaknesses of business for taking corrective measures.
5. To ascertain the financial position of business: The profit and loss account gives the amount of profit or loss made by the business during a particular period. However, it is not enough. The businessman must know about his financial position i.e., balance sheet (also called position statement). The balance sheet is a statement of assets and liabilities of the business on a particular date.
6. To ascertain the amounts payable or receivables: The goods may be purchased or sold on credit for the enterprise. It will result into opening of debtors and creditors accounts. How much amount is payable to the creditors, what is the credit period extended by them has to be ascertained so that timely payments could be made to the suppliers. Similarly, the amount receivable from debtors is also ascertained so that timely collection may be made in order to avoid bed debts and to improve liquidity position of the enterprise.
7. To watch the movement of capital: Every businessman is interested to know whether the capital introduced by him is intact or not. The upward or downward movement of capital is closely watched from the account maintained for this purpose.
8. To prevent errors, theft and fraud: The proper recording of the items purchased and used keeps a check on the physical stocks of the raw materials, finished goods, stationery. items and properties of the business Accounting helps in preventing errors, thefts and frauds. 9. To know the progress of the business: The trend of the expenses, losses, incomes,sales or purchases indicate the progress of the business from year to year.
10. To have valuation information for legal and tax purposes: The business enterprises are supposed to follow the relevant legal and tax requirements. These requirements are linked with amounts of profits, capital, sales and other aspects of business which are available from the accounting records.
What is book keeping explain the relationship between book keeping and accounting
Book-keeping and Accounting:
Book-keeping is mainly concerned with recording of financial data relating to the business operations in a significant and orderly manner. It is the science and art of correctly recording in books of account all those business transactions that result in the transfer of money or money's worth. It is mechanical and repetitive. Accounting is a broader and more analytical subject. It includes the design of accounting system which the book-keepers use, preparation of financial statements, audits, cost studies, income-tax work and analysis and interpretations of accounting information for internal and external end- users as an aid to
Sl. No Basis of Book keeping Accounting
difference 1 Stage It is the basis of accounting It is the culmination of bookkeeping it starts where bookkeeping ends 2 Scope It confines itself to recording It extends to present of final posting balancing and accounts after incorporating preparation of trial balance year end adjustments 3 Skill It is done by junior stop because It is done by senior staff because the nature of work is clerical natural jobs requires imagination skill an analytical ability 4 Operation It records transactions in a it classifies summarises and significant and orderly manner provides information 5 Activities it covers journalising, posting It covers the person of final and extracting of balances accounts and balance sheet 6 Adjustment and No adjustment or rectification is Adjustments, transports, rectification required allocations as per policy framework are incorporated in the final accounts 7 Nature Duties are preliminary in nature Primary data are Co related, analysed and converted into secondary information 8 Step It is the first step before It follows after bookkeeping accounting commence procedures are completed
"The Language of Business: How Accounting Tells Your Story" "A Comprehensive Guide to Understanding, Interpreting, and Leveraging Financial Statements for Personal and Professional Success"
"The Language of Business: How Accounting Tells Your Story" "A Comprehensive Guide to Understanding, Interpreting, and Leveraging Financial Statements for Personal and Professional Success"
