Financial accounting is a specialized branch of accounting that keeps track of a company’s financial transactions. Define with Explain it each one Concept of Financial Accounting Discuss the topic, Financial Accounting – Meaning, Definition, Nature, Scope, and Disadvantages of Limitations. Using standardized guidelines, the transactions record, summarize, and present in a financial report or financial statements such as an income statement or a balance sheet. Companies issue financial statements on a routine schedule. The statements are considered external because they are given to people outside of the company, with the primary recipients being owners/stockholders, as well as certain lenders. It also learns Accountability in Financial Management.
Learn, Explain Financial Accounting: Meaning, Nature, Scope, and Disadvantages.
If a corporation’s stock is publicly traded, however, its financial statements [Hindi] (and other financial reporting) tend to widely circulate, and information will likely reach secondary recipients such as competitors, customers, employees, labor organizations, and investment analysts. It’s important to point out that the purpose of financial accounting is not to report the value of a company. Rather, its purpose is to provide enough information for others to assess the value of a company for themselves.
Because external financial statements are used by a variety of people in a variety of ways, financial accounting has common rules known as accounting standards and as generally accepted accounting principles (GAAP). In the U.S., the Financial Accounting Standards Board (FASB) is an organization that develops accounting standards and principles. Corporations whose stock publicly trade must also comply with the reporting requirements of the Securities and Exchange Commission (SEC), an agency of the U.S. government. The similarity between Financial and Management Accounting.
Meaning of Financial Accounting:
Accounting is the process of recording, classifying, summarizing, analyzing, and interpreting the financial transactions of the business for the benefit of management and those parties who are interested in business such as shareholders, creditors, bankers, customers, employees, and government. Thus, it concerns with financial reporting and decision-making aspects of the business.
The American Institute of Certified Public Accountants Committee on Terminology proposed in 1941 that accounting 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.”
The term ‘Accounting’ unless otherwise specifically stated always refers to ‘Financial Accounting’. It is commonly carrying on in the general offices of a business. It concerns with revenues, expenses, assets, and liabilities of a business house. Also, they have the two-fold objective, viz,
- To ascertain the profitability of the business, and
- To know the financial position of the concern.
Nature and Scope of Financial Accounting:
Financial accounting is a useful tool to manage and to external users such as shareholders, potential owners, creditors, customers, employees, and government. It provides information regarding the results of its operations and the financial status of the business.
The following are the functional areas of financial accounting:-
1] Dealing with financial transactions:
Accounting as a process deals only with those transactions which are measurable in terms of money. Anything which cannot be expressed in monetary terms does not form part of financial accounting however significant it is.
2] Recording of information:
Accounting is the art of recording financial transactions of a business concern. There is a limitation on human memory. It is not possible to remember all transactions of the business. Therefore, the information is recorded in a set of books called Journal and other subsidiary books and it is useful for management in its decision-making process.
3] Classification of Data:
The recorded data arrange in a manner to group the transactions of similar nature at one place so that full information of these items may collect 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, the trial balance prepare.
4] Making Summaries:
The classified information of the trial balance uses to prepare a profit and loss account and balance sheet in a manner useful to the users of accounting information. As well as, the final accounts prepare to find out the operational efficiency and financial strength of the business.
It is the process of establishing the relationship between the items of the profit and loss account and the balance sheet. Also, the purpose is to identify the financial strength and weaknesses of the business. It also provides a basis for interpretation.
6] Interpreting financial information:
It is concerned with explaining the meaning and significance of the relationships established by the analysis. It should be useful to the users, to enable them to take correct decisions.
7] Communicating the results:
The profitability and financial position of the business as interpreted above communicate to the interest parties at regular intervals to assist them to make their conclusions.
Disadvantages or Limitations of Financial Accounting:
The concerns with the preparation of final accounts. Also, the business has become so complex that mere final accounts are not sufficient for meeting financial needs. It is like a post-mortem report. At the most, it can reveal what has happened so far, but it cannot exercise any control over the past happenings.
The disadvantages of financial accounting are as follows:-
- It records only quantitative information.
- Records only the historical cost. The impact of future uncertainties has no place in financial accounting.
- It does not take into account price level changes.
- It provides information about the whole concern. Product-wise, process-wise, department-wise, or information of any other line of activity cannot obtain separately from financial accounting.
- Cost figures do not know in advance. Therefore, it is not possible to fix the price in advance. It does not provide information to increase or reduce the selling price.
- As there is no technique for comparing the actual performance with that of the budgeted targets, it is not possible to evaluate the performance of the business.
- It does not tell about the optimum or otherwise of the quantum of profit made and does not provide the ways and means to increase the profits.
In other words;
- In case of loss, whether loss can reduce or convert into profit using cost control and cost reduction? It does not answer this question.
- Does it not reveal which departments are performing well? Which ones are incurring losses and how much is the loss in each case?
- It does not provide the cost of products manufactured
- There are no means provided by financial accounting to reduce the wastage.
- Can the expenses reduce which results in the reduction of product cost and if so, to what extent and how? No answer to these questions.
- It is not helpful to the management in taking strategic decisions like a replacement of assets, an introduction of new products, discontinuation of an existing line, expansion of capacity, etc.
- It provides ample scope for manipulation like overvaluation or undervaluation. This possibility of manipulation reduces reliability.
- It’s technical. A person not conversant with accounting has little utility of the financial accounts.