2. CONTENT
• Basic introduction to Financial Accounting
• Definition
• Accounting steps
• Objectives of Financial Accounting
• Advantages of Accounting
• Limitations of Accounting
3. DEFINITION OF ACCOUNTING
According to the American Institute of
Certified Public Accountants (AICPA).
Accounting is the art of recording,
classifying and summarizing in a
significant manner and in terms of money
transactions and events which are of a
financial character and interpreting the
results thereof.
5. OBJECTIVES OF ACCOUNTING
Maintainer of Accounting Records
Ascertainment of profit or Loss
Depiction of Financial Position
Providing information
6. Maintainer of Accounting Record
Accounting records are the basis for the
accounting work. The records have to be
maintained systematically. While maintaining
the accounting records, the generally accepted
accounting conventions and concepts have to
be followed.
7. Ascertainment of Profit or Loss
Accounting is expected to ascertain and reveal
the net results of the operations of a business.
Various interested parties like owners,
management, investors, and creditors should
be supplied with the results of operations as per
their specific requirements. While finalizing the
accounts, objective approach is essential,
combined with consistency and conservatism.
8. Depiction of financial position
A true and fair view of the financial position
should be presented. The properties and
assets possessed by the business should be
shown at appropriate values as per the
prevailing practices. The stake of creditors
and owners in the business should be clearly
presented. All the material information must
be clearly disclosed.
9. Providing Information
• In the recent years, providing information has become the
most important objective of accounting.
• The American Accounting Association (AAA) has listed
out the following purposes for which accounting should
provide information.
1. Making decisions and determination of objectives .
2. Effective directing the controlling of an organization's
human and material resources
3. Maintaining and reporting on the custodianship of
resources.
10. Advantages of Accounting
Systematic Record
Preparation Financial Statement
Assessment of progress
Aid to Decision making
Statutory Requirements
Information to Interested groups
Evidence in Courts
Taxation problems
Merger of firms
11. Systematic Records
All the business transactions are recorded in the
books of accounts. Any event or happening which
has financial effect is included in the accounting
records. They are always at the disposal of the
management for decision making.
12. Preparation of Financial Statements
Results of business operations and the
financial position of the concern are
provided by accounting periodically. This
is essential for distribution of profits to the
owners and for planning the future policies
and programmes by the management.
13. Assessment of Progress
• Accounting analyses and interprets financial
statements to reveal the progress made in
different areas and it also identifies areas of
weakness and stagnation. Management is
provided with a complete picture of the
liquidity, profitability and stability aspects
of the business.
14. Aid to Decision Making
• Management of a firm has to make
innumerable routine and policy
decisions while discharging its functions.
Accounting provides the relevant data to
make the decisions appropriate and
effective.
15. Statutory Requirements
Various legal requirements like
maintenance of Provident fund for
employees, Employees State Insurance
contributions, deductions of tax at
source, filing of tax returns etc, are
properly fulfilled with the help of
accounting.
16. Information to Interested Groups
Accounting supplies appropriate
information to different interested
groups such as owners, creditors,
employees, financiers, tax authorities and
government.
17. Evidence in Courts
Accounting records are usually accepted
as authentic evidence in courts of law in
the settlements of disputes.
19. Merger of Firms
When two or more existing businesses decide
to merge, accounting records are the basis for
deciding the terms of merger and any
compensation payable as a consequence of
merger.
20. Limitations of Accounting
1. It ignores transactions which cannot be expressed in terms
of money.
2. Accounting depends on estimates and forecasts so
accounting results may not be accurate and reliable.
3. It cannot record all the events and transactions.
4. Accounting also ignores the price level changes which
alter the values of asset and liabilities. Because of inflation
profit ascertained and financial position are unrealistic and
unreliable.
