Description
Every origination whether it is a company or group of companies or firm or co-operative societies is engaged in so many economic activities in everyday, like purchasing of raw materials, selling of finished goods and meeting the day-to-day expenses etc.
FINANCIAL ACCOUNTING
Introduction
Every origination whether it is a company or group of companies or firm or co-operative societies is engaged in so many economic activities in everyday, like purchasing of raw materials, selling of finished goods and meeting the day-to-day expenses etc,. Even an individual also performs some economic activities in his day-to-day life. The economic activities are performed through “Transactions and Events”. Transaction means “a business, performance of an act, an agreement”. Event means “a happening, a consequence of transaction or a result”. The transactions and events are measured in terms of money. ‘In terms of money means ‘measuring in the ruling currency of a country’. The main objective of the business is to earn profit. So every organization wants to know the information about the economic activities which it performed. Basing on that information it assess the performance of the organization, means whether it is in a profitable position or not. It also takes certain decisions regarding to further activities. So every organization must maintain some records about its economic activities in a systematic way. Accounting discipline has been developed to serve this purpose as it deals with the measurement the economic activities, which help o develop useful information for decision making. The main aim of the3 accounting is to meet the information needs of the rational and sound decision makers. So accounting is called as the “Language of the Business”.
Definition
“Accounting is the art of recording classifying and summarizing in a significant manner and in terms of money transactions and events which are in part at least of a financial character and interpreting the results thereof.” --- American Institute of Certified Public Accountants (AICPA) “The function of the accounting is to provide quantitative information, primarily of financial in nature, about economic entities, that is needed to be useful in making economic decisions.” --- Accounting Principle Board (APB) Thus from the above definitions accounting is the process of recording, classifying, summarizing, analyzing, and interpreting the financial transactions and communicating the results thereof to the persons interested in such information.
Objectives
1. Systematic recording of transactions: It is the basic objective of accounting. It is also clear from the definition. The financial aspects of business transactions must be record in a systematic manner. These recorded transactions are later on classified and summarized logically for the preparation of financial statements and for their analysis and interpretation. 2. Ascertainment of results of above recorded transactions: Every business organization wants to earn more profit. This is the basic objective of an organization. To know whether the organization is in a profitable position or not. The accountant must ascertain the results of the recorded transactions. It is the most important objective of accounting. With this the management takes the decisions on particular matters which affects the profitability of an organization. 3. Ascertaining the financial position of the business: Businessman is not only interested in knowing the results of the business in terms of profit or loss for a particular period but also want to know that what he owes to the outsiders and what he owns on a certain date. With the help of balance sheet he knows the financial position. So ascertainment of the financial position of the organization is also the important objective of accounting. 4. Providing information to the users: Accounting as a language of business communicates the financial results of an enterprise to various users by way of financial statements. Accounting aims to meet the information needs of the decision-makers and helps them in rational decision-making. 5. To know the solvency position: By preparing the Balance Sheet management not only reveals what is owned and owed by the enterprise, but also it gives the information regarding the concern’s ability to meets its liabilities in the short run (Liquidity Position) and also In the long run (Solvency Position) as and when they fall due.
Functions
The progress or development and reputation of any small or big business is built upon sound financial footing. The following are the functions of the accounting. 1. Recording of financial information: Accounting is an art of recording financial transaction of a business concern. This is the basic function of accounting. It is not possible to remember all transactions in a systematic way to the human memory. Accounting is necessary to supplement this. Accounting ensures that all business transactions of financial character are recorded in an orderly manner. 2. Classification of data: It is also one of the important functions of accounting. Classification concerned with systematic analysis of the recorded data with a view to group transactions of one nature is kept at one place. In other words classification means that data of one nature is kept at one place. It is not possible to know the profit and the financial position of the organization without classifying the data according to their nature. This is done in the book termed as ‘ledger’. 3. Making summaries of classified data: Another important function of financial accounting is to make summaries of recorded and classified data. Classified data is used to prepare financial accounts, i.e. Pal A/c and Balance Sheet. P&L A/c is prepared with the items of revenue nature for a given period. Similarly Balance Sheet is prepared with various assets and liabilities of a business concern. 4. Dealing with financial transactions: Financial accounting records only financial transactions and events capable of measuring in terms of money. Transactions which are not of financial nature are not recorded in the books of account. 5. Interpretation of financial information: Another important function of financial accounting is the interpretation of financial information. It plays a very important role in decision making process of a business concern. This recorded financial data is interpreted in a manner that the end users such as bankers, investors, creditors and shareholders can make a meaningful judgment about the overall financial condition and profitability of a business. 6. Making information more reliable: This other important function of accounting is to make the financial information more reliable and useful. This is done by the use of internationally accepted accounting standards for preparing financial accounts. 7. Communicating results:
Accounting is the language for communicating the financial information to those who have an interest in using and interpreting them. The profitability and financial position of the business concern are communicated through Profit and Loss Account and Balance sheet. 8. Legal requirement: In case of registered company, auditing is compulsory. Auditing is not possible without accounting. Thus, accounting becomes compulsory to comply with legal requirements. With the help of accounting various documents are prepared and filed with the departments concerned from time to time.
Scope of accounting
Accounting is concerned with transactions and events. These transactions are measured and expressed in terms of money and recorded in the books of account. All these transactions of financial nature are first recorded in subsidiary books concerned. These recorded transactions are classified and posted in into accounts in the ledger. Periodically these accounts are balanced and trial balance is prepared. The trial balance is the basis for preparation of trading and profit and loss account to know the financial results that are profit or loss of these transactions, and balance sheet to know the financial position on a particular date. The financial statements i.e. P&L A/c and Balance Sheet are analyzed and reports are prepared and sent to the management and other interested parties to take decisions.
Advantages
1. It provides useful information for making economic decisions. 2. It serves primarily those users who have limited authority, ability or resources to obtain information who rely on financial statements as their principal sources of information about an enterprise’s economic activities. 3. It measures the performance of a business entity. 4. It helps to forecast future performance and financial position of the enterprise using past data. 5. It also identifies the weakness of the operational system and provides feedbacks regarding effectiveness of measures adopted to check such weaknesses. 6. It assess the performance achieved in relation to targets and discloses information regarding accounting policies and contingent liabilities which play an important role in predicting, comparing and evaluating the financial results. 7. It provides information to the Govt. to exercise control on the entity and as well as in collecting of tax revenues. 8. It also provides information to investors and creditors to take rational decisions.
Limitations
1. Historical in nature: Financial accounting is historical in nature. It records only those transactions which have taken place in the business during a particular period of time. There is no place for uncertainties in financial accounting. It cannot give suggestions to run organization efficiently. Financial accounting provides information for the future planning or for the formulation of future policies. 2. Insufficient data: Data provided in financial statements is insufficient for proper analysis and decision making. It only provides information about over all costs and profitability of the business. No information is given about costs and profitability product wise, process wise and department wise which are very efficiently in cost determination and cost control. 3. Cost control not possible: In financial accounting cost control is not possible. It provides the cost figures only at the end of the financial year. It can give information only after the expenses are incurred as a result measures cannot be taken to control the costs. No technique is available in financial accounting to know whether costs incurred are to be reviewed from time –to- time. This cannot be done in financial accounting. 4. Only actual costs recorded: Financial accounting records only actual cost paid. The purchase of assets including goods is recorded at cost price. But the prices of the goods and assets go on changing from timeto-time. Book value of the assets may be different from the present value (may be more or less). The price level changes are not brought into books by the financial accounting making the comparison of various years difficult. Apart from this it is difficult to have a correct picture of the assets of the firm. 5. Not helpful in price fixation: Financial accounting is of no use in fixing prices of products. Under this method prices cannot be fixed in-advance because of the cost of production is ascertained only after incurring all expenses. Preparation of quotations etc. is very difficult. 6. Ignorance of non-monetary information: Financial Accounting records only those tractions which are of a financial character. Transactions and events of non-monetary information are not recorded though they are more important and whose effect is there on the organization image. Eg: Extent of competition faced by business, technical innovations processed by business, efficiency of employees, changes in the value of money etc., are very important from the view point of management, but accounting did not take them into accounts.
7. Influence of principles and personal judgment: Normally, facts and figures recorded in financial statements are generally influenced by accounting concepts, conventions and personal judgments. So they do not reveal a true picture. In many cases, estimates may be used to determine the value of various items. Eg: Debtors are estimated in the terms of collectability, inventories are based on marketability. All these are materially accepted by personal judgement. 8. Permits alternative treatments: Financial Accounting allows alternative treatment of certain items. For example, there are different methods of providing for depreciation, valuation of stock etc., and all are generally accepted methods. As a result of this the results of different periods and different concerns are not comparable. 9. Technical subject: Financial accounting is a technical subject. It requires special knowledge of accounting principles for recording transactions in the books of account and making their use. This is not useful to persons without or with little knowledge. 10. Manipulation of financial statements: It is quite possible that the management may manipulate the financial statements. For example, over-valuation or under-valuation of stock, showing less or more depreciation to increase or decrease the profits. There are many reasons due to which profit are shown at lesser or higher figure viz., to get more managerial remuneration, declaring /paying more dividends to shareholders, to save taxes, to pay fewer bonuses to workers etc.
doc_126799553.docx
Every origination whether it is a company or group of companies or firm or co-operative societies is engaged in so many economic activities in everyday, like purchasing of raw materials, selling of finished goods and meeting the day-to-day expenses etc.
FINANCIAL ACCOUNTING
Introduction
Every origination whether it is a company or group of companies or firm or co-operative societies is engaged in so many economic activities in everyday, like purchasing of raw materials, selling of finished goods and meeting the day-to-day expenses etc,. Even an individual also performs some economic activities in his day-to-day life. The economic activities are performed through “Transactions and Events”. Transaction means “a business, performance of an act, an agreement”. Event means “a happening, a consequence of transaction or a result”. The transactions and events are measured in terms of money. ‘In terms of money means ‘measuring in the ruling currency of a country’. The main objective of the business is to earn profit. So every organization wants to know the information about the economic activities which it performed. Basing on that information it assess the performance of the organization, means whether it is in a profitable position or not. It also takes certain decisions regarding to further activities. So every organization must maintain some records about its economic activities in a systematic way. Accounting discipline has been developed to serve this purpose as it deals with the measurement the economic activities, which help o develop useful information for decision making. The main aim of the3 accounting is to meet the information needs of the rational and sound decision makers. So accounting is called as the “Language of the Business”.
Definition
“Accounting is the art of recording classifying and summarizing in a significant manner and in terms of money transactions and events which are in part at least of a financial character and interpreting the results thereof.” --- American Institute of Certified Public Accountants (AICPA) “The function of the accounting is to provide quantitative information, primarily of financial in nature, about economic entities, that is needed to be useful in making economic decisions.” --- Accounting Principle Board (APB) Thus from the above definitions accounting is the process of recording, classifying, summarizing, analyzing, and interpreting the financial transactions and communicating the results thereof to the persons interested in such information.
Objectives
1. Systematic recording of transactions: It is the basic objective of accounting. It is also clear from the definition. The financial aspects of business transactions must be record in a systematic manner. These recorded transactions are later on classified and summarized logically for the preparation of financial statements and for their analysis and interpretation. 2. Ascertainment of results of above recorded transactions: Every business organization wants to earn more profit. This is the basic objective of an organization. To know whether the organization is in a profitable position or not. The accountant must ascertain the results of the recorded transactions. It is the most important objective of accounting. With this the management takes the decisions on particular matters which affects the profitability of an organization. 3. Ascertaining the financial position of the business: Businessman is not only interested in knowing the results of the business in terms of profit or loss for a particular period but also want to know that what he owes to the outsiders and what he owns on a certain date. With the help of balance sheet he knows the financial position. So ascertainment of the financial position of the organization is also the important objective of accounting. 4. Providing information to the users: Accounting as a language of business communicates the financial results of an enterprise to various users by way of financial statements. Accounting aims to meet the information needs of the decision-makers and helps them in rational decision-making. 5. To know the solvency position: By preparing the Balance Sheet management not only reveals what is owned and owed by the enterprise, but also it gives the information regarding the concern’s ability to meets its liabilities in the short run (Liquidity Position) and also In the long run (Solvency Position) as and when they fall due.
Functions
The progress or development and reputation of any small or big business is built upon sound financial footing. The following are the functions of the accounting. 1. Recording of financial information: Accounting is an art of recording financial transaction of a business concern. This is the basic function of accounting. It is not possible to remember all transactions in a systematic way to the human memory. Accounting is necessary to supplement this. Accounting ensures that all business transactions of financial character are recorded in an orderly manner. 2. Classification of data: It is also one of the important functions of accounting. Classification concerned with systematic analysis of the recorded data with a view to group transactions of one nature is kept at one place. In other words classification means that data of one nature is kept at one place. It is not possible to know the profit and the financial position of the organization without classifying the data according to their nature. This is done in the book termed as ‘ledger’. 3. Making summaries of classified data: Another important function of financial accounting is to make summaries of recorded and classified data. Classified data is used to prepare financial accounts, i.e. Pal A/c and Balance Sheet. P&L A/c is prepared with the items of revenue nature for a given period. Similarly Balance Sheet is prepared with various assets and liabilities of a business concern. 4. Dealing with financial transactions: Financial accounting records only financial transactions and events capable of measuring in terms of money. Transactions which are not of financial nature are not recorded in the books of account. 5. Interpretation of financial information: Another important function of financial accounting is the interpretation of financial information. It plays a very important role in decision making process of a business concern. This recorded financial data is interpreted in a manner that the end users such as bankers, investors, creditors and shareholders can make a meaningful judgment about the overall financial condition and profitability of a business. 6. Making information more reliable: This other important function of accounting is to make the financial information more reliable and useful. This is done by the use of internationally accepted accounting standards for preparing financial accounts. 7. Communicating results:
Accounting is the language for communicating the financial information to those who have an interest in using and interpreting them. The profitability and financial position of the business concern are communicated through Profit and Loss Account and Balance sheet. 8. Legal requirement: In case of registered company, auditing is compulsory. Auditing is not possible without accounting. Thus, accounting becomes compulsory to comply with legal requirements. With the help of accounting various documents are prepared and filed with the departments concerned from time to time.
Scope of accounting
Accounting is concerned with transactions and events. These transactions are measured and expressed in terms of money and recorded in the books of account. All these transactions of financial nature are first recorded in subsidiary books concerned. These recorded transactions are classified and posted in into accounts in the ledger. Periodically these accounts are balanced and trial balance is prepared. The trial balance is the basis for preparation of trading and profit and loss account to know the financial results that are profit or loss of these transactions, and balance sheet to know the financial position on a particular date. The financial statements i.e. P&L A/c and Balance Sheet are analyzed and reports are prepared and sent to the management and other interested parties to take decisions.
Advantages
1. It provides useful information for making economic decisions. 2. It serves primarily those users who have limited authority, ability or resources to obtain information who rely on financial statements as their principal sources of information about an enterprise’s economic activities. 3. It measures the performance of a business entity. 4. It helps to forecast future performance and financial position of the enterprise using past data. 5. It also identifies the weakness of the operational system and provides feedbacks regarding effectiveness of measures adopted to check such weaknesses. 6. It assess the performance achieved in relation to targets and discloses information regarding accounting policies and contingent liabilities which play an important role in predicting, comparing and evaluating the financial results. 7. It provides information to the Govt. to exercise control on the entity and as well as in collecting of tax revenues. 8. It also provides information to investors and creditors to take rational decisions.
Limitations
1. Historical in nature: Financial accounting is historical in nature. It records only those transactions which have taken place in the business during a particular period of time. There is no place for uncertainties in financial accounting. It cannot give suggestions to run organization efficiently. Financial accounting provides information for the future planning or for the formulation of future policies. 2. Insufficient data: Data provided in financial statements is insufficient for proper analysis and decision making. It only provides information about over all costs and profitability of the business. No information is given about costs and profitability product wise, process wise and department wise which are very efficiently in cost determination and cost control. 3. Cost control not possible: In financial accounting cost control is not possible. It provides the cost figures only at the end of the financial year. It can give information only after the expenses are incurred as a result measures cannot be taken to control the costs. No technique is available in financial accounting to know whether costs incurred are to be reviewed from time –to- time. This cannot be done in financial accounting. 4. Only actual costs recorded: Financial accounting records only actual cost paid. The purchase of assets including goods is recorded at cost price. But the prices of the goods and assets go on changing from timeto-time. Book value of the assets may be different from the present value (may be more or less). The price level changes are not brought into books by the financial accounting making the comparison of various years difficult. Apart from this it is difficult to have a correct picture of the assets of the firm. 5. Not helpful in price fixation: Financial accounting is of no use in fixing prices of products. Under this method prices cannot be fixed in-advance because of the cost of production is ascertained only after incurring all expenses. Preparation of quotations etc. is very difficult. 6. Ignorance of non-monetary information: Financial Accounting records only those tractions which are of a financial character. Transactions and events of non-monetary information are not recorded though they are more important and whose effect is there on the organization image. Eg: Extent of competition faced by business, technical innovations processed by business, efficiency of employees, changes in the value of money etc., are very important from the view point of management, but accounting did not take them into accounts.
7. Influence of principles and personal judgment: Normally, facts and figures recorded in financial statements are generally influenced by accounting concepts, conventions and personal judgments. So they do not reveal a true picture. In many cases, estimates may be used to determine the value of various items. Eg: Debtors are estimated in the terms of collectability, inventories are based on marketability. All these are materially accepted by personal judgement. 8. Permits alternative treatments: Financial Accounting allows alternative treatment of certain items. For example, there are different methods of providing for depreciation, valuation of stock etc., and all are generally accepted methods. As a result of this the results of different periods and different concerns are not comparable. 9. Technical subject: Financial accounting is a technical subject. It requires special knowledge of accounting principles for recording transactions in the books of account and making their use. This is not useful to persons without or with little knowledge. 10. Manipulation of financial statements: It is quite possible that the management may manipulate the financial statements. For example, over-valuation or under-valuation of stock, showing less or more depreciation to increase or decrease the profits. There are many reasons due to which profit are shown at lesser or higher figure viz., to get more managerial remuneration, declaring /paying more dividends to shareholders, to save taxes, to pay fewer bonuses to workers etc.
doc_126799553.docx