Financial Accounting

Meaning and Scope of Accounting – Part II

(Procedures of accounting cont…)

2. Using The Financial Information: – There are certain users of accounts. In the beginning, it was viewed that accounting is meant only for proprietors and business persons, but growing time changed this thinking.

Now it is believed that besides the owner and management of the business concerns, users of accounts include the customers, employees, investors, lenders, suppliers, government and other stakeholders.

Accounting provides the art of presenting accounting data in a useful and significant way. Accounting data is more useful when it stresses on economic activities. Any information is useless and irrelevant unless it is understandable to the user.

The information provided by the accounting should be free from any bias. The user should be able to use not only the financial result but also he should be able to assess its reliability and compare it with information about alternative opportunities.

The owner or management of the enterprise, also known as internal users, uses the accounting information in an analytical manner to take rational decisions. Hence, the information provided them is different from the information provided to outsiders. Even the small details’ which can affect the internal working of the organisation is given to the management.

Objectives of Accounting

Now we shall discuss the main objectives of accounting, which are as follows:

Systematic recording of transactions

The basic objective of accounting is to systematically record the financial aspects of business transactions, also known as bookkeeping. These recorded transactions are later on classified and summarised logically for the preparation of financial statements and for their analysis and interpretation.

Ascertainment of the results of the above recorded transactions

Profit and loss account is prepared to know the result of business operations for a particular period of time. If revenues exceed the expenses then it is said that business is running profitably but if expenses exceed the revenues it can be said that business is incurring the loss. Hence, profit and loss account helps management and other stakeholders in taking rational decisions.

Ascertainment of financial position

Businessmen are not only interested in knowing the results of the business in terms of profit or loss only for a particular period but also would like to know what he owes to outsiders and what he owns on a certain date. For this purpose, a financial position statement is prepared which is also popularly known as Balance Sheet.

The Balance Sheet is a statement of assets and liabilities of the business at a particular point of time and it helps in assessing the health of the business organisation at a particular point in time.

Providing help to users for decision making

Accounting as a ‘language of business’ communicates the financial results and financial position of a business enterprise to various stakeholders. In this way, it meets the information needs of the user of financial statement in decision making.

To know the solvency Position

By preparing the balance sheet, management not only reveals what it owned and owed by the business enterprise but also it gives the information regarding concern’s ability to meet its abilities in the short run and also in the long run as and when they fall due.

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