Importance of finance accounting: Financial accounting, is important for all types of companies. They analyse financial statement for decision making that affect the financial status of firm (Kimuda, 1986). Management use financial statements for internal purpose. Financial accounting measures general business transactions, economic resources, financial obligations and change in them in terms of monetary units of society in which it operates (Jawahar Lal, 2009).
The accounting techniques used in financial accounting depends on the notion of double entry system. The end product of financial accounting system is financial statements that give valuable information to decision makers such as profit and loss account. These are general purpose reports which provide information on management performance to judge its effectiveness in utilising recourse and running of enterprise (Jawahar Lal, 2009). It is intended to offer useful information through preparing general purpose reports to investors, creditors, and other users in making good investments and economic decisions. The main objective of Financial Accounting is to prepare profit and loss account and balance sheet for reporting to owners and outside parties (Bhar, 1976).
It provides information how companies are doing, whether these are earning profit. Scope of financial accounting: Financial accounting system gives summarized and categorized information about the performance of organization and its state of affairs mainly for external decision makers. Comparability can be ensured by applying the same accounting policies over time. Understandability: Accounting reports should be clearly understood to accountant and by those at whom the information is aimed.Ĭomparability: Financial reports from different periods should be comparable with one another in order to derive meaningful conclusions about the trends in an entity's financial performance and position over time. Often information that is highly relevant isn't very reliable, and vice versa.
It should be capable to be relied upon by managers. Reliability: Accounting must be precise or unbiased. Materiality: Information is material if its error or misstatement could influence the economic decisions of users taken on the basis of the financial statements. This trait is important for developing statements. It must be possible for accounting information to influence decisions. Relevance: Financial accounting is decision-specific. Financial accounting processīasic features of financial accounting are as under: Conversely, International Financial Reporting Standards is a set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements. It encompasses the standards, conventions and rules that accountants follow in recording and summarising and in the preparation of financial statements. Generally Accepted Accounting Principles is the standard framework for guidelines for financial accounting used in any given jurisdiction. Such decisions might include evaluating employment potential, lending money, granting credit, and buying or selling ownership shares.įinancial accountancy is directed by both local and international accounting standards. Individuals who achieve high level knowledge of financial accounting can utilize this information to take vital decisions based on the organization's perceived financial health and viewpoint. In management literature, it is thoroughly represented that financial accounting incorporates the rules and procedures to express financial information about an organization. Owners may make a direct investment in the business or operate at a profit and leave the profit in the business. Residual interest is another name for owners' equity. Owners' equity signifies the owners' residual interest in the assets of the business. They are probable future sacrifices of economic remunerations which arise as the result of past transactions or events. Liabilities are present obligations of the firm. They represent probable future economic benefit and arise as result of past transactions or events. In this assets are valuable resource that are owned by firm. This is a mathematical equation which must balance.
The purpose of financial accounting is to ascertain the results (profit or loss) of business operations during the particular period and to state the financial position (balance sheet) as on a date at the end of the period.įinancial accounting is based upon the accounting equation. Concept of financial accounting: In general way, financial accounting is the statement of information about a business or other type of organization so that executives or staff can assess its financial growth and future results.
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