E-Content

Introduction to Financial Accounting

Introduction

Business is an economic activity conducted to earn profits and increase the wealth of the owner. Business rules are
based on general principles of trade social values and the national or international boundaries legal framework. While
these variables the vary for different companies and regions, the basic goal is to add value to the product or service in
order to satisfy customer demand

Through reporting all transactions related to the development of monetary inflows of sales revenue and monetary
outflows of operating expenses, a business accounting system ensures an accountability. The accounting system
provides the financial information needed to assess the efficacy of both current and past activities. The accounting
system also provides the data required to file reports that show the status of a business entity's borrower liabilities,
ownership equities and asset capital.

Financial accounting meaning and function

Accounting is a business language which elucidates the various kinds of transactions during the given period of time.
Accounting is broadly classified into three different functions viz. l Recording l Classifying and l Summarizing.

Accounting is treated as the language of business. It records all the transactions which can be measured in money
and have occurred in a particular period. Accounts of a business provide useful information to its users.

Functions of Accounting

Accounting has a very broad scope and area of operation. Its use is not limited only to the business world but is
distributed throughout all facets of society and all occupations. Nowadays, financial transactions must take place in
any social institution or professional practice, whether that is income generating or not. Therefore the need to record
and summarize these transactions as they occur emerges and there is a need to figure out the net result of the same
after the expiry of a certain fixed period.

· To keep systematic records- Accounting is performed to keep a systematic record of financial transactions. The
primary objective of accounting is to help collect financial data and to record it systematically for the derivation of
correct and useful results of financial statements.

· To ascertain profitability -With the help of accounting, the profits and losses incurred during a specific
accounting period can be evaluated. With the help of a Trading and Profit& Loss Account, the profit or loss of a firm
can be easily determined.

· To ascertain the financial position of the business - A balance sheet or a statement indicates the financial
position of a company as on a particular date. A properly drawn balance sheet gives us an indication of the value of
assets, the nature and value of a liability, and also the capital position of the firm. Thus, the soundness of any business
entity can be easily ascertained.

· To assist in decision-making- To take decisions for the future, there is a need for accurate financial
statements. One of the main objectives of accounting is to take the right decisions at the right time. Thus, accounting
gives the platform to plan for the future with the help of past records.
· To fulfil Law compliance- Business entities like organizations, trusts, and societies are being run and governed
according to different legislative acts. Similarly, different taxation laws (direct-indirect tax) are also applicable to every
business house. It is required to keep and maintain various types of accounts and records as prescribed by
corresponding laws of the land. Accounting helps in running a business in compliance with the law.