Concept, nature and limitation of financial accounting Essay

Accounting is the act of recording, classifying, summarizing, analyzing and interpreting the fiscal legal proceeding of the ancestry for the benefit of vigilance and those parties who are elicit in seam such as shareholders, creditors, bankers, customers, employees and government. Thus, it is concerned with pecuniary reporting and decision fashioning aspects of the business. The American Institute of Certified Public Accountants Committee on oral communication proposed in 1941 that score may be defined as, 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 so. fiscal ACCOUNTINGThe term Accounting unless otherwise specifically state always refers to pecuniary Accounting. Financial Accounting is commonly carries on in the general offices of a business. It is concerned with revenues, expenses, assets and liabilities of a business house. Financial Accounting has two-fold objective, viz, To ascertain the favourableness of the business, and to know the financial position of the concern. personality AND SCOPE OF FINANCIAL ACCOUNTINGFinancial novels report is a helpful tool to management and to external users such as shareholders, potential owners, creditors, customers, employees and government. It provides education regarding the results of its operations and the financial status of the business. The following are the functional areas of financial accounting- Dealing with financial transactions Accounting as a process deals only with those transactions which are measurable interms of money. Anything which can non be express in monetary terms does notform part of financial accounting even significant it is. Recording of entropy Accounting is an art of recording financial transactions of a business concern. Thereis a limitation for human memory.It is not possible to remember all transactions ofthe business. Therefore, the information is recorded in a set of books called Journaland other subsidiary books and it is useful for management in its decision makingprocess. Classification of Data The recorded data is set up in a manner so as to group the transactions of similar nature at one place so that upright information of these items may be collected under different heads. This is make in the book called Ledger. For example, we may have accounts called Salaries, Rent, following, Advertisement, etc. To verify the arithmetical accuracy of such accounts, mental test balance is inclined(p). Making Summaries The classified information of the trial balance is utilize to prepare profit and loss account and balance sheet in a manner useful to the users of accounting information.The final accounts are prepared to find out operational efficiency and financial strength of the business. Analyzing It is the process of establishing the relationship between the items of the profit andlo ss account and the balance sheet. The purpose is to line the financial strength and weakness of the business. It also provides a basis for interpretation. translation the financial information It is concerned with explaining the meaning and significance of the relationshipestablished by the analysis. It should be useful to the users, so as to enable them to memorize correct decisions. Communicating the results The profitability and financial position of the business as interpreted above arecommunicated to the interested parties at regular intervals so as to assist them tomake their own conclusions. LIMITATIONS OF FINANCIAL ACCOUNTINGFinancial accounting is concerned with the preparation of final accounts. The business has become so complex that mere final accounts are not sufficient in meeting financial needs. Financial accounting is standardized a post-mortem report. At the most it can develop what has happened so far, nevertheless it cannot exercise any control over the past happenings. The limitations of financial accounting are as follows1. It records only quantitative information.2. It records only the historical equal. The force of future uncertainties has no place in financial accounting.3. It does not take into account price level changes.4. It provides information about the whole concern. Product-wise, process-wise, department-wise or information of any other line of activity cannot be obtained one after another from the financial accounting.5. Cost figures are not known in advance. Therefore, it is not possible to fix the price inadvance. It does not provide information to change magnitude or reduce the selling price.6. As there is no technique for comparing the actual performance with that of the budgeted targets, it is not possible to respect performance of the business.7. It does not tell about the optimum or otherwise of the quantum of profit made and does not provide the ways and means to increase the profits.8. In case of loss, whethe r loss can be reduced or converted into profit by means of hail control and cost reduction? Financial accounting does not answer this question.9. It does not reveal which departments are performing well? Which ones are incurring losses and how more than is the loss in each case?10. It does not provide the cost of merchandises manufactured11. There is no means provided by financial accounting to reduce the wastage.12. Can the expenses be reduced which results in the reduction of product cost and if so, to what extent and how? No answer to these questions.13. It is not helpful to the management in taking strategic decisions like replacement of assets, introduction of new products, discontinuation of an existing line, expansion of capacity, etc.14. It provides ample scope for habit like overvaluation or undervaluation. This possibility of manipulation reduces the reliability.15. It is technical in nature. A person not conversant with accounting has little utility-grade of the fina ncial accounts.