Financial Accounting and its characteristic features
Explain Financial Accounting. What are its characteristic
features?
Financial
Accounting is the process in which business transactions are recorded
systematically in the various books of accounts maintained by the organization in
order to prepare financial statements. These financial statements are basically
of two types: First is Profitability Statement or Statement of comprehensive
income and second is Statement of Financial Position.
Following are the characteristics
features of Financial Accounting:
1) Monetary Transactions: In financial accounting only transactions in
monetary terms are considered. Transactions not expressed in monetary terms do
not find any place in financial accounting, howsoever important they may be
from business point of view.
2) Historical Nature: Financial
accounting considers only those transactions which are of historical nature i.e
the transaction which have already taken place. No futuristic transactions find
any place in financial accounting, howsoever important they may be from
business point of view.
3) Legal Requirement: Financial
accounting is a legal requirement. It is necessary to maintain the financial
accounting and prepare financial statements there from. It is also obligatory
to get these financial statements audited.
4) External Use: Financial
accounting is for those people who are not part of decision making process
regarding the organization like investors, customers, suppliers, financial
institutions etc. Thus, it is for external use.
5) Disclosure of Financial Status:
It discloses the financial status and financial performance of the business as
a whole.
6) Interim Reports: Financial
statements which are based on financial accounting are interim reports and
cannot be the final ones.
7) Financial Accounting Process: The
process of financial accounting gets affected due to the different accounting
policies followed by the accountants. These accounting policies differ mainly
in two areas: Valuation of inventory and Calculation of depreciation.
Following are the characteristics features of Financial Accounting:
1) Monetary Transactions: In financial accounting only transactions in monetary terms are considered. Transactions not expressed in monetary terms do not find any place in financial accounting, howsoever important they may be from business point of view.
2) Historical Nature: Financial accounting considers only those transactions which are of historical nature i.e the transaction which have already taken place. No futuristic transactions find any place in financial accounting, howsoever important they may be from business point of view.
3) Legal Requirement: Financial accounting is a legal requirement. It is necessary to maintain the financial accounting and prepare financial statements there from. It is also obligatory to get these financial statements audited.
4) External Use: Financial accounting is for those people who are not part of decision making process regarding the organization like investors, customers, suppliers, financial institutions etc. Thus, it is for external use.
5) Disclosure of Financial Status: It discloses the financial status and financial performance of the business as a whole.
6) Interim Reports: Financial statements which are based on financial accounting are interim reports and cannot be the final ones.
7) Financial Accounting Process: The process of financial accounting gets affected due to the different accounting policies followed by the accountants. These accounting policies differ mainly in two areas: Valuation of inventory and Calculation of depreciation.
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