crossorigin="anonymous"> what is financial accounting? Nature and limitations best 01

what is financial accounting? And its Nature and limitations

Meaning of Financial Accounting:- Financial accounting is concerned with recording, classifying, and summarising financial transactions of a business for an accounting period. Let’s know by definition what is financial accounting.

This is done for the purpose of determining profit and loss of the business and its financial position.


According to Smith:- Financial Accounting 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 accounting involves preparing a profit and loss account and Balance sheet as at the end of the period.


Nature of Financial Accounting:- Financial accounting deals with the financial transaction of business. Any day to day transaction deals with finance are recorded in the financial accounting. Financial accounting is mainly concerned with preparation and communication of financial reports of the business. These financial statements are “Trading and Profit & loss account” Which is known as income statement. Second one statement is a “Balance Sheet” which is known as a Position Statement. Nature also gives the meaning of what is financial accounting.

Thus, Nature of Financial Accounting has to go through the following terms.

  • Identifying:- First Financial account identified financial transactions in the business. For the purpose of recording in the books of account.
  • Measuring :- Next nature of financial accounting measures the transaction in the form of money.
  • Recording:- Then the nature of the financial account recorded the transaction in the books of account.
  • Classifying:- The nature of financial accounts classifying all transactions in the same nature. As from various transactions out of which belonged to the same nature of the group these are clubbed. What is financial accounting.
  • Interpreting:- The financial account enables the data transaction in the form of a statement. Which will be interpretable by any normal person.
  • Communication:- After interpreting the statement then the same interpreting will be communicated to the upper level management.

So Nature of a financial account has to go through these processes and has to involve financial types of data. What is the financial accounting?

Limitations of Financial Accounting

Following are the major limitations of financial accounting

  1. Financial Accounting is of Historical Nature:- Financial accounting 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.
  1. Financial accounting 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.
  2. 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.what is financial accounting
  3. 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. What is financial accounting?
  4. 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.
  5. 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.

Thus, from the above discussion we can understand the types of nature of financial accounting as well as its limitations along with meaning. What is the financial accounting

Other Essential question of Financial accounting.

What is financial accounting? Explain its objectives and limitations.

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