Accounting is the language of business. It is an information system that measures business activities, processes information and communicates financial information and results to decision makers. Accounting is a tree while financial accounting is one of its branches.
Definitions of Financial Accounting
- According to American Accounting Association (AAA): “The process of identifying, measuring, and communicating economic information to permit informed judgement and decisions by users of the information”
- According to American Institute of Certified Public Accountants (AICPA): “A service activity whose function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions”
Objectives – Financial Accounting for SSC CGL
- To keep systematic record
- To protect business properties
- To ascertain the operational profit or loss
- To ascertain the financial position of business
- To facilitate rational decision making
Functions – Financial Accounting for SSC CGL
- Recording data about business transaction
- Summarizing results of business activity into useful report
- Providing assurance that business is operating as intended
- Providing data for decision makers external to the organization, such as stockholders, suppliers, banks, and government agencies.
|The term ‘nature’ means quality or feature of a subject. And the term ‘scope’ means the things that a particular subject covers or deals with. Thus the nature and scope of accounting simply mean the essential features of accounting and what the accounting covers or deals with.|
Nature of Financial Accounting
The accounting system is a series of steps performed to analyze record, quantify, accumulate, summarize, classify, report, and interpret economic events and their effects on an organization and to prepare the financial statements. Accounting systems are designed to meet the needs of the decisions makers who use the financial information.
Every business has some sort of accounting system. These accounting systems may be very complex or very simple, but the real value of any accounting system lies in the information that the system provides.
- Accounting is a process: Accounting is identified as a process as it performs the specific task of collecting, processing and communicating financial information.
- Accounting is an art: Accounting is an art of recording, classifying, summarizing and finalizing the financial data.
- Accounting is means and not an end: Accounting finds out the financial results and position of an entity and the same time, it communicates this information to its users. Thus, accounting itself is not an objective, it helps attaining a specific objective. So it is said the accounting is ‘a means to an end’ and it is not ‘an end in itself.’
- Accounting deals with financial information and transactions; Accounting records the financial transactions and date after classifying the same and finalizes their result for a definite period for conveying them to their users.
- Accounting is an information system: Accounting is recognized and characterized as a storehouse of information. As a service function, it collects processes and communicates financial information of any entity.
Scope of Financial Accounting
Accounting has got a very wide scope and area of application.
- In the modern world, accounting system is practiced not only in all the business institutions but also in many non-trading institutions like Schools, Colleges, Hospitals, Charitable Trust Clubs, Co-operative Society etc. and also Government and Local Self-Government in the form of Municipality, Panchayat. The professional persons like Medical practitioners, practicing Lawyers, Chartered Accountants etc. also adopt some suitable types of accounting methods.
- As a matter of fact, accounting methods are used by all who are involved in a series of financial transactions.
- As accounting is a dynamic subject, its scope and area of operation have been always increasing keeping pace with the changes in socio-economic changes. As a result of continuous research in this field the new areas of application of accounting principles and policies are emerged. National accounting, human resources accounting and social Accounting are examples of the new areas of application of accounting systems.
Essential features of Accounting
- Identifying: It should be identifiable
- Measuring: It is measuring data for business
- Recording: It is concerned with the recording of financial transactions in an orderly manner, soon after their occurrence in the proper books of accounts
- Classifying: It is concerned with the systematic analysis of the recorded data so as to accumulate the transactions of similar type at one place. This function is performed by maintaining the ledger in which different accounts are opened to which related transactions are posted
- Summarizing: It is concerned with the preparation and presentation of the classified data in a manner useful to the users. This function involves the preparation of financial statements such as Income Statement, Balance Sheet, Statement of Changes in Financial Position, Statement of Cash Flow, Statement of Value Added
- Interpretation: The accountants should interpret the statements in a manner useful to action. The accountant should explain not only what has happened but also (a) why it happened, and (b) what is likely to happen under specified conditions
- Communicating: Finally, the accounting function is to communicate the financial data to the users.
Limitations of Financial Accounting:
- Financial accounting permits alternative treatments
- Financial accounting is influenced by personal judgement
- Financial accounting ignores important non – monetary information
- Financial accounting does not provide timely information
- Financial accounting does not provide detailed analysis
- Financial does not disclose the present value of the business
To sum up, Financial Accounting is the systematic approach for optimizing resources and assets for increasing the productivity of organisation.
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