Concept, nature and limitation of financial accounting Essay

Accounting is the procedure of entering. sorting. sum uping. analysing and construing the fiscal minutess of the concern for the benefit of direction and those parties who are interested in concern such as stockholders. creditors. bankers. clients. employees and authorities. Therefore. it is concerned with fiscal coverage and determination devising facets of the concern. The American Institute of Certified Public Accountants Committee on Terminology proposed in 1941 that accounting may be defined as. “The art of entering. classifying and summarizing in a important mode and in footings of money. minutess and events which are. in portion at least. of a fiscal character and construing the consequences thereof” . FINANCIAL Accounting:

The term ‘Accounting’ unless otherwise specifically stated ever refers to ‘Financial Accounting’ . Financial Accounting is commonly carries on in the general offices of a concern. It is concerned with grosss. disbursals. assets and liabilities of a concern house. Financial Accounting has double aim. viz. To determine the profitableness of the concern. and to cognize the fiscal place of the concern.

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Fiscal accounting is a utile tool to direction and to external users such as stockholders. possible proprietors. creditors. clients. employees and authorities. It provides information sing the consequences of its operations and the fiscal position of the concern. The following are the functional countries of fiscal accounting: – Covering with fiscal minutess: Accounting as a procedure deals merely with those minutess which are mensurable interms of money. Anything which can non be expressed in pecuniary footings does notform portion of fiscal accounting nevertheless important it is. Recording of information: Accounting is an art of entering fiscal minutess of a concern concern. Thereis a restriction for human memory.

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It is non possible to retrieve all minutess ofthe concern. Therefore. the information is recorded in a set of books called Journaland other subordinate books and it is utile for direction in its determination devising procedure. Categorization of Datas: The recorded information is arranged in a mode so as to group the minutess of similar nature at one topographic point so that full information of these points may be collected under different caputs. This is done in the book called ‘Ledger’ . For illustration. we may hold histories called ‘Salaries’ . ‘Rent’ . ‘Interest’ . Advertisement’ . etc. To verify the arithmetical truth of such histories. test balance is prepared. Making Summaries: The classified information of the test balance is used to fix net income and loss history and balance sheet in a mode utile to the users of accounting information.

The concluding histories are prepared to happen out operational efficiency and fiscal strength of the concern. Analyzing: It is the procedure of set uping the relationship between the points of the net income andloss history and the balance sheet. The intent is to place the fiscal strength and failing of the concern. It besides provides a footing for reading. Interpreting the fiscal information: It is concerned with explicating the significance and significance of the relationshipestablished by the analysis. It should be utile to the users. so as to enable them totake right determinations. Communicating the consequences: The profitableness and fiscal place of the concern as interpreted above arecommunicated to the interested parties at regular intervals so as to help them tomake their ain decisions. LIMITATIONS OF FINANCIAL Accounting:

Fiscal accounting is concerned with the readying of concluding histories. The concern has become so complex that mere concluding histories are non sufficient in run intoing fiscal demands. Financial accounting is like a post-mortem study. At the most it can uncover what has happened so far. but it can non exert any control over the past occurrences. The restrictions of fiscal accounting are as follows:

1. It records merely quantitative information.
2. It records merely the historical cost. The impact of future uncertainnesss has no topographic point in fiscal accounting.
3. It does non take into account monetary value degree alterations.
4. It provides information about the whole concern. Product-wise. process-wise. department-wise or information of any other line of activity can non be obtained individually from the fiscal accounting.
5. Cost figures are non known in progress. Therefore. it is non possible to repair the monetary value in progress. It does non supply information to increase or cut down the merchandising monetary value.
6. As there is no technique for comparing the existent public presentation with that of the budgeted marks. it is non possible to measure public presentation of the concern.
7. It does non state about the optimum or otherwise of the quantum of net income made and does non supply the ways and means to increase the net incomes.
8. In instance of loss. whether loss can be reduced or converted into net income by agencies of cost control and cost decrease? Fiscal accounting does non reply this inquiry.
9. It does non uncover which sections are executing good? Which 1s are incurring losingss and how much is the loss in each instance?
10. It does non supply the cost of merchandises manufactured
11. There is no agencies provided by fiscal accounting to cut down the wastage.
12. Can the disbursals be reduced which consequences in the decrease of merchandise cost and if so. to what extent and how? No reply to these inquiries.
13. It is non helpful to the direction in taking strategic determinations like replacing of assets. debut of new merchandises. discontinuance of an bing line. enlargement of capacity. etc.
14. It provides ample range for use like overestimate or undervaluation. This possibility of use reduces the dependability.
15. It is proficient in nature. A individual non familiar with accounting has small public-service corporation of the fiscal histories.

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