Financial Accounting – Meaning And Functions Of Financial Accounting

Meaning Of Accounting – Accounting is that system under which the transactions and events of business are recorded in monetary terms. Under it, accounting terms and concepts are used to describe the events that make up the existence of business. It records the business transactions taken place during the accounting period. At the end of the period, it shows the result of the transactions in the form of final accounts consisting of profit and loss account and balance sheet. For preparing these accounting includes identifying, recording, classifying, summarising and interpreting the results of the business transactions, so that, accurate decisions may be taken regarding business. Accounting is a means of communicating business information relevant to the objectives of the decision makers both internal and external.

Functions Of Financial Accounting

(1) Calculation of Profit and Loss – The main objective of accounting is to calculate the profit or loss for a definite period of time from business transactions. In order to fulfill this objective, ‘Trading and Profit and Loss Account’ is prepared at the end of accounting period. Under it, purchases, sales, incomes and expenses of the whole year are recorded. If the total income of a business is more than expenses, then business earns net profit. On the contrary, if expenses are more than total income of business, then business suffers net loss.

(2) Keeping Systematic Record of Business Transactions – Under accounting, all business transactions are recorded regularly according to the respective dates, so that these transactions or records may be kept for a long time. The complete record of business transactions decreases the possibility of errors and frauds in accounts. In order to fulfill this objective, oftenly all transactions are recorded prior in journal or subsidiary books. Afterwards, these transactions are posted into ledger.

(3) Depicting the Financial Position – The objective of accounting is to depict the financial position of the business. For this, balance sheet is prepared at the end of the financial year. It shows the various assets on the one hand and the liabilities and capital on the other hand. It depicts the financial position of the business on a certain date.

(4) Portray of Liquidity Position – Accounting provides information about the liquidity position of firm to the internal and external parties because through it, current assets and current liabilities of firm are recorded fully. With its help, different parties related to the firm may take right decisions.

(5) Detection of Errors and Frauds – If all accounts related to business transactions are recorded properly, then errors and frauds can be detected easily.

(6) Assessment of Tax – Each business firm has to pay the tax on its income, production, sales etc. The accurate accounting books are helpful in the assessment of tax because the complete knowledge regarding actual sales production and income of business is obtained through these. In their absence the tax authority can charge high amount of tax from the business.

(7) Communicating the Accounting Information – Accounting communicates the required accounting information to the various interested parties such as owners, creditors, investors, bankers, government etc. Such information enables these parties to take the important decisions regarding business.

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