Functions and limitations of financial Accounting

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Accounting is often referred to as the language of the business. Financial Accounting is concerned with recording of day to day transactions.





Definition:-

     American institute of certified public accountants has defined the Accounting as the art of recording Classifying and Summarizing in a significant manner and in terms of monetary transactions and events which in part, at least of financial character and Interpreting the results thereof.

    Two principle statements of financial Accounting are income and expenditure statement (profit and loss Account) and balance sheet. The profit and loss account reveals the profit and loss account reveals the profit earned or loss sustained for a given period i.e for a year . All revenue transactions are included in this statement with a view to determine the profitability of the business concern. Balance sheet reveals the financial position for the business concern on a particular date.


Functions of financial Accounting:-

     The progress and reputation of any business big or small, as built upon sound financial footing. Financial Accounting provides information relating to the results of business operations. The following are the important functions of financial Accounting:


1) Recording of financial information:- Accounting is an art of recording financial transactions of a business concern. This is the basic function of Accounting. Owing to limitations of human memory, it is not possible to remember all transactions in a business in the sequence of their dates. Accounting is necessary to supplement human memory. Accounting ensures that all business transactions of financial character are recorded in an orderly manner.


2) Classification of data:- Clasification is concerned with systematic analysis of the recorded data with a view to group Transactions of one nature at one place. This is done in the Book 📚 called Ledger. In a ledger the entries relating to different items are brought to one place.


3) making summaries of classified data :- Another important function of financial Accounting is to make summaries of recorded and classified data. Classified data is used to prepare final accounts i.e profit and loss Account and balance sheet. Profit and loss Account is prepared with the items of revenue nature for a given period. Balance sheet is prepared with various assets and liabilities of a business concern. The final accounts help the internal as well as external users of Accounting statements to find out the operational efficiency and financial strength of the business concern.

4) Dealing with financial transactions:- Financial Accounting records only financial transactions and events capable of measuring in terms of money 💰. Transactions which are not of financial are not recorded in the book's of Account.


5) Interpretation of financial information:- Another important function of financial Accounting is the interpretation of financial information which plays a very important role in decision making process of a business concern. This recorded financial data is interpreted in a manner that the end users such as 🏦 Banker's, investor's, creditors and shareholders can make a meaningful judgement about the over all financial condition and profitability of a business.

6) Communicating Results:- Accounting is the language for communicated through profit and loss account and balance sheet. The parties who are interested to know the results of the business can make their own conclusion by going through the financial statements.

7) Legal Requirements:- In case of registered firms, auditing, compulsory. Auditing is not possible without Accounting. Thus, Accounting becomes compulsory to comply with legal requirements. With the help of accounting various document are prepared and files with departments concerned from time to time.

8) Making Information More Reliable:- The other important function of financial Accounting is to make the financial information more useful and reliable. This is done by the use of internationally accepted accounting standard for preparing financial accounts.

Limitations of financial Accounting

1. It does not give clear information about operating efficiency of a firm.

2. It does not disclose profit or loss of each department.

3. It does not help in determining the price of product or service.

4. It does not provide department-wise , process-wise or product-wise Clasification of costs.

5. It does not provide adequate information for control of material labor and overheads.

6. It does not help in Classifying the cost as direct or indirect to determine the controllability or uncontrollability.

7. It does not provide day-to-day cost information.

8. It does not provide adequate information to prospective investors.

9. It does not provide completer analysis of losses which may be due to defective Material, idle time etc.

10. It does not provide useful data for decision making in special areas such as introducing new product, replacement or labour by machinery etc.











 



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