Accounting: Basic Accounting: Objectives of financial accounting

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The main objectives of financial accounting are as under

  • Finding out various balances

  • Providing knowledge of transactions

  • Ascertaining net profit or loss

  • Depicting financial position

  • Information to all interested users

  • Fulfilling legal obligations

Fig 1.2 Financial Accounting Objectives

Image of Financial Accounting Objectives

Image of Financial Accounting Objectives

Functions of Financial Accounting

The function of accounting is to provide quantitative information primarily financial in nature about economic entities. It is intended to be useful in making economic decisions.

  • Maintaining systematic records

  • Communicating the financial results

  • Meeting Legal Requirements

  • Fixing responsibility

  • Decision making

Fig 1.2 Financial Accounting Function

Image of Financial Accounting Function

Image of Financial Accounting Function

Limitations of Accounting

  • Accounting information is expressed in terms of Money: Non-monetary transactions are completely omitted

  • Fixed assets are recorded in the accounting records at the original cost: Actual amount spent on the assets like building, machinery, plus all incidental charges is recorded. Effect of price rise in prices cannot take in consideration. So that balance sheet cannot represent the true financial position of the business.

  • Accounting information is sometimes based on estimates: Estimates are often inaccurate. For example, it is not possible to predict the actual life of an asset as purpose of depreciation.

  • Accounting information is not neutral or unbiased: Accountants ascertain income as excess of revenue over expenses. They consider selected revenue or expenses for calculating profit of the concern. They cannot include cost of such items as water, noise or air pollution.

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