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FINANCIAL ACCOUNTING – . MEANING OF FINANCIAL ACCOUNTING Financial Accounting is the art of recording, classifying and summarizing in a significant manner in terms of money, transactions and events which are, in part at least of a financial character and interpreting the results thereof.
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FINANCIAL ACCOUNTING – MEANING OF FINANCIAL ACCOUNTING Financial Accounting is the art of recording, classifying and summarizing in a significant manner in terms of money, transactions and events which are, in part at least of a financial character and interpreting the results thereof. The American Accounting Association (AAA) defines accounting as “The process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information.Thus the process of recording, classifying, summarizing, analyzing and interpreting the financial transactions and communicating the results thereof to the persons interested in such information.
SCOPE • To maintain systematic record • To ascertain the financial position of business • To ascertain the operational profit or loss • To facilitate rational decision making • Knowledge of debtors and creditors • Knowledge of purchase and sales • Basis of income tax and sales tax • Information regarding performance and position • Comparison • Proof in the court • Helpful in raising loans • Helpful in insolvency • Assistance to various parties • Errors and frauds Thus financial Accounting has a wider scope than book keeping in the sense that along with recording , classifying and summarizing business transactions it also covers analysis and interpretation of those records.
IMPORTANCE Importance Financial Accounting is important to various users of the accounts. These could be the owners, management, creditors, investors, employees, bankers, government and the shareholders. Broadly we can divide them into • Internal users • External users . Users External internal Owners Management Employees Creditors Investors Government Customers Researchers Foreigners Others
ACCOUNTING PRINCIPLES • Accounting principles Accounting concepts Accounting conventions Consistency Materiality Conservatism Full disclosure • Business Entity concept • Going concern concept • Accounting period concept • Money measurement concept • Dual aspect concept • Cost concept • Matching concept • Realization concept • Accrual concept
GAAP • Accounting standards issued by the accounting bodies and the rules pronounced by the other legal and governmental authorities for the maintenance of the books of accounts are jointly called “Generally Accepted Accounting Principles” or GAAP. Every country would have its own GAAP. However because of globalization there is an increasing pressure on Indian companies to slowly conform to international GAAP. • Indian GAAP comprises a set of pronouncements issued by various regulatory bodies, but it is predominantly controlled by the ICAI. Besides Accounting Standards, ICAI issues guidance notes on areas not specifically covered by Accounting Standards. • The International Accounting standard Committee (IASC) has so far issued 31 Accounting standards. These have to be kept in mind while formulating accounting policies of the companies.
Case Study • Rajan is the accountant of a small company making two or three different types of household tools. He systematically and accurately collects and records all transactions of the company and prepares statements, so that the management knows the annual profit and financial position. “What more can a good accountant do?” ponders Rajan. From your understanding of the scope of accounting, advise him in what other ways he might be of service to the management. Finanancial statements enable the reporting of financial position to the owners of the business. Besides those who lend money to the business need to be kept informed about the current financial performance and the financial condition of the entity. Case 2 Zozo Chemicals have their financial accounting in place and have implemented good accounting softwares which keeps them updated with the financial changes. However the managers are worndering if if is so important to implement all of these? How will this affect their function as a manager As managers, one needs to perform various roles such as planning controlling directing, evaluating and taking corrective actions. Business managers need to decide continuously what to do, how to doit, and whether the actual results tally the original plans and targets. Accounting provides timely and useful information to do these activities and take the correct decision in the light of these statements.