Financial accounting
Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions pertaining to a business
According toInternational Financial Reporting Standards (IFRS) is a set of international accounting standards stating how
particular types of transactions and other events should be reported in
financial statements.
Important of financial accounting
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Relevance: Financial accounting which is decision-specific.
It must be possible for accounting information to influence decisions.
Unless this characteristic is present, there is no point in cluttering
statements.
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Materiality: information is material if its omission or
misstatement could influence the economic decisions of users taken on
the basis of the financial statements.
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Reliability: accounting must be free from significant error
or bias. It should be capable to be relied upon by managers. Often
information that is highly relevant isn’t very reliable, and vice versa.
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Understandability: accounting reports should be expressed as
clearly as possible and should be understood by those at whom the
information is aimed.
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Comparability: 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. Comparability can be ensured by applying the same
accounting policies over time.
Objectives of Financial Accounting
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Systematic recording of transactions: basic objective of
accounting is to systematically record the financial aspects of business
transactions (i.e. book-keeping). These recorded transactions are later
on classified and summarized logically for the preparation of financial
statements and for their analysis and interpretation.
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Ascertainment of result of above recorded transactions:
accountant prepares profit and loss account to know the result of
business operations for a particular period of time. If expenses exceed
revenue then it is said that business running under loss. The profit and
loss account helps the management and different stakeholders in taking
rational decisions. For example, if business is not proved to be
remunerative or profitable, the cause of such a state of affair can be
investigated by the management for taking remedial steps.
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Ascertainment of the financial position of business:
businessman is not only interested in knowing the result of the business
in terms of profits or loss for a particular period but is also anxious
to know that what he owes (liability) to the outsiders and what he owns
(assets) on a certain date. To know this, accountant prepares a
financial position statement of assets and liabilities of the business
at a particular point of time and helps in ascertaining the financial
health of the business.
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Providing information to the users for rational decision-making:
accounting as a ‘language of business’ communicates the financial
result of an enterprise to various stakeholders by means of financial
statements. Accounting aims to meet the financial information needs of
the decision-makers and helps them in rational decision-making.
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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 concern’s
ability to meet its liabilities in the short run (liquidity position)
and also in the long-run (solvency position) as and when they fall due.
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