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| Subject: Financial accounting | |
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Author: Anonymous |
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Date Posted: 15:54:24 01/22/16 Fri Financial accounting (or financial accountancy) is the field of accounting concerned with the summary, analysis and reporting of financial transactions pertaining to a business.This involves the preparation of financial statements available for public consumption. Stockholders, suppliers, banks, employees, government agencies, business owners, and other stakeholders are examples of people interested in receiving such information for decision making purposes. Financial accountancy is governed by both local and international accounting standards. Generally Accepted Accounting Principles (GAAP) is the standard framework of guidelines for financial accounting used in any given jurisdiction. It includes the standards, conventions and rules that accountants follow in recording and summarising and in the preparation of financial statements. On the other hand, International 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. IFRS are issued by the International Accounting Standards Board (IASB). With IFRS becoming more widespread on the international scene, consistency in financial reporting has become more prevalent between global organisations. While financial accounting is used to prepare accounting information for people outside the organisation or not involved in the day-to-day running of the company, management accounting provides accounting information to help managers make decisions to manage the business. Financial accounting is the preparation of financial statements that can be consumed by the public and the relevant stakeholders using either HCA or CPPA. When producing financial statements, they must comply to the following:[6] 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. Materiality: information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. 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. Understandability: accounting reports should be expressed as clearly as possible and should be understood by those at whom the information is aimed. 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 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.[8] 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. 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. 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. 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. [ Next Thread | Previous Thread | Next Message | Previous Message ] |