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FINANCIAL ACCOUNTING

  • FUNCTIONS OF FINANCIAL ACCOUNTING

The main objectives of Financial Accounting are:

(i) Recording Business Transaction. The first and foremost objective of Financial Accounting is to record business transactions which are maintained systematically with the help of journal and ledger and also to prepare Final Account. With the help of these facilities it is easy to know the operating results and financial position of the organization.

(ii) Managerial Functions. Decision making is an important process of the management. Financial Accounting provides necessary information to the managerial functions and decision making programmers. Without accounting proper decision making is not possible.

(iii) Legal Requirement Function. Business disputes are unavoidable. If there is any dispute properly maintained accounts are often treated as a good evidence in the court to settle a dispute. Auditing is compulsory in case of registered firms.

(iv)              Language of Business. Investors, Employees, Creditors, and Government etc. are interested in knowing the operational results of the firm and it can be communicated to them only through accounting.

(v)                Replacement of Memory. Now-a-days large number of business transactions is carried out, and it is very difficult for a businessman to remember all the transactions. With the help of Financial Accounting, which provides records which will furnish information as and when needed and thus it replaces human memory 

(vi)              Comparative Study. Financial Accounting provides necessary steps for comparative study of various aspects of the business such as Profit,. Sales, Liabilities, Loans, Fixed assets etc. with that of previous year and helps the businessman to make changes if any.

(vii)            Sale of Business. The circumstance arises when the businessman wants to sell his business means; he wants to determine the total value of his business with the help of systematic recording of financial data.

 

  • LIMITATIONS OF FINANCIAL ACCOUNTING 

Financial Accounting suffers the following limitations:

(i)                 Records of Monetary Transactions. Accounting records are maintained only when transactions are expressed in monetary terms. At the same time, those transactions which cannot be measured in monetary terms are not to be recorded. It excludes qualitative elements like management reputation, employee morale, labor strike, etc.

(ii)               Recording Actual Cost. Cost concept is found in financial accounting. If the effect of price level changes is not brought into the books, comparison of various years becomes difficult. Financial accounting records are based only on Actual Cost. This type of accounting techniques actually reduces the utilities and usefulness. 

(iii)             Personal Bias of Accountant affects the Accounting Statements. Normally Accounting policies are framed by the Accountants. They differ on the use of accounting principles. And at the same time a number of conventions, concepts and postulates have been propounded in accountancy. Their use is greatly affected by the personal judgment of Accountants. Sometime different financial results are obtained from the same concern’s financial statements. Because these statements are prepared by two different accountants with varying personal judgment in using or applying particular conventions.

(iv)              Incomplete Information. Financial Accounting discloses only the net result of the consolidated business transactions. It does not disclose profit or loss of each department’s job, process, etc. The product-wise or job-wise cost of production cannot be found out.

(v)                Permits Alternative Treatments. Financial Accounting permits alternative treatments within generally accepted accounting concepts. For example, closing stock may be valued by FIFO or LIFO or average method or market price method. Applications of different methods may give different results and at the same time results may not be comparable.

(vi)              Only Quantitative Information. Financial Accounting will be taken into account only on those factors which are being quantitatively expressed. But quantifiable information could not be considered. Because the management has to follow the government policies which relate to the Economic development of the country.

(vii)              Technological Revolution. Due to the development of Science and Technology, all types of business information and data are needed for effective functioning of the organization. But financial accounting provides only elementary information. So, this is not enough to meet out the current level of competition.