What is financial accounting? Explain its objectives and limitations.
Meaning of Financial Accounting:- Financial accounting is concerned with recording, classifying, and summarising financial transactions of a business for an accounting period.
This is done for the purpose of determining profit and loss of the business and its financial position.
Definition
According to Smith:- Financial Account is a science of recording and classifying business transactions primarily of financial Character and the art of making significant summaries and interpretation of those transactions and Communicating the results to persons who must make decisions or form judgements.
In other words:- Financial account involves preparing a profit and loss account and Balance sheet as at the end of the period.
OBJECTIVE of Financial Accounting:-
There are two types of objectives
- Primary Objective
- Secondary Objective
1.Primary
- To Maintain Records :- Records of business transactions are maintained in monetary form. It is the first step in preparation for a financial account. After recording daily business transactions, financial results are revealed during the period for the purpose of finding the financial position of the business.
- To Ascertain Profit or loss:- Profit and loss account as well as trading account are prepared to calculate profit earned or losses suffered during a period of time. It is known as an Income Statement.
- To Judge the Financial Position:- Information about the financial position is required for the purpose of decision making. For this purpose a Balance sheet is prepared. Which is known as a Financial position Statement. Which statement involves
capital + Liabilities = Assets.
2. Secondary Objectives
- Provide help to File Tax Returns:- Financial Account provides help for filling the income tax Return.
- Provide Communication Information to Various Groups:- Financial Account provides precious information to various Stakeholders like owner, Creditors, Government and Debtors. Who could take decisions as per the data given by the financial account.
- To Enable preparing a Budget:- Data given by a Financial Account will be helpful for preparing a Budget. Without which it will be difficult.
- To Control over Assets and Property :- Information given by financial accounting is helpful to control over assets and property of business. So misuse of assets will be prevented.
- Helpful in Rational Decision Making :- Financial accounts also provide help to taking Rational Decision. As Diversification of products, Make or Buy decision, Renewing and Replacement decision and Accepting and Rejecting etc.
So all the above Objective of Financial Accounting will be helpful on the Business way.
Limitations of Financial Accounting in the commerce
As we study some Objective of Financial Account but here are Some Limitations which we need to discuss on the financing Account Journey. So let’s discuss all these limitations.
Following are the major limitations of financial accounting
- Financial Accounting is of Historical Nature:- Financial account deals with historical data. Which Transactions are incurred in the past that are recorded in accounting. So it doesn’t show any information about the future. So it does not help the management in planning and decision making. It reveals the current financial position of the business but does not suggest the way in which it can be improved.
- Financial account deals with overall Profitability:- Financial accounting considers the whole business as a single entity. Financial accounting recorded all transactions for the entire business instead of individual divisions.
- No Provision for Cost-Control:- As we know financial accounting is mainly concerned with the past performance of business. So it does not help in exercising control over costs. In financial accounting no certain responsibility is fixed for avoiding wastage and excessive expenditure.
- Affected by personal Judgement:- Accountants who create the financial accounting may use their own judgement which may be biassed. Example as : Valuation of Stock, Depreciation on assets, Doubtful Debtor.
- Lack of Consistency:- Accountants have to follow certain accounting principles for recording the business transactions. If these principles are not followed uniformly in every consecutive year then accounting information may become inconsistent.
- Incomplete Knowledge of Costs:- Financial account does not provide proper information about the cost of production and services. As it is difficult to ascertain wastage and losses of raw materials in a financial account.
Conclusion:- Financial accounting is an essential account of business without which work of business cannot be run. But it serves some objective to business as well as some limitations which can’t be ignored on the business way. Which we have learned in the above discussion.
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