Concept, nature and limitation of financial accounting Essay

account is the process of recording, classifying, summarizing, analyzing and interpreting the financial transactions of the business for the benefit of management and those fare nearlyies who are interested in business much(prenominal) as shareholders, creditors, bankers, customers, employees and government. Thus, it is concerned with financial reporting and termination making aspects of the business. The American Institute of Certified Public Accountants Committee on speech communication proposed in 1941 that accounting system 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 thereof. FINANCIAL ACCOUNTINGThe term Accounting unless otherwise specifically stated always refers to pecuniary Accounting. Financial Accounting is commonly carries on in the general offices of a business. It is concerned with revenue s, expenses, assets and liabilities of a business house. Financial Accounting has two-fold objective, viz, To ascertain the arrive atableness of the business, and to know the financial position of the concern.NATURE AND SCOPE OF FINANCIAL ACCOUNTINGFinancial accounting is a useful tool to management and to external users such as shareholders, potential owners, creditors, customers, employees and government. It provides selective information 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 expressed in monetary terms does nonform part of financial accounting however significant it is. Recording of information 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 arranged in a manner so as to group the transactions of similar record at one place so that full information of these items may be collected under different heads. This is done in the book called ledger. For example, we may have accounts called Salaries, Rent, Interest, Advertisement, etc. To verify the arithmetical accuracy of such accounts, trial balance is prepared. Making Summaries The classified information of the trial balance is used to prepare scratch and loss account and balance sheet in a manner useful to the users of accounting information.The net accounts are prepared to find out operational efficiency and financial strength of the business. Analyzing It is the process of establishing the relationship bet ween the items of the profit andloss account and the balance sheet. The character is to identify the financial strength and weakness of the business. It also provides a basis for interpretation. Interpreting 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 totake 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 like a post-mortem report. At the some it can reveal what has happened so far, but it cannot exercise any control over the past happenings. The limitations of financial accounting are as follows1. It records only quantifiable information.2. It records only the historical cost. The impact of future uncertainties has no place in financial accounting.3. It does not take into account price level changes.4. It provides information some the whole concern. Product-wise, process-wise, department-wise or information of any other line of activity cannot be obtained separately 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 increase 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 evaluate 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 substance to increase the profits.8. In case of loss, whet her loss can be reduced or converted into profit by means of cost 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 much is the loss in each case?10. It does not provide the cost of products 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 celestial orbit for manipulation 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 value of the finan cial accounts.