FINANCIAL ACCOUNTING – MEANING, OBJECTIVES AND LIMITATIONS

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Financial accounting is the branch of accounting that is primarily concerned with the recording and processing of a company's financial transactions in order to reveal changes in the wealth of the company over a given period.

It is concerned with the preparation of financial statements such as profit and loss accounts and balance sheets using generally accepted accounting principles.

Financial accounting is mainly concerned with determining profit (or loss) and determining the financial position of a business at any given time.

Objectives Of Financial Accounting

The main objectives of financial accounting are to:

1. maintain systematic records of a company's transaction

2. Assist in determining the profitability of a business.

3. Provide users with information so that they can make informed decisions. 

4. Assist in determining a company's financial position.

5. safeguard the interest of various stakeholders in the organization

6. Ensure that the company follows all legal requirements, such as paying taxes.

Limitations Of Financial Accounting

While financial accounting is important, it does have some limitations which are explained below.

1. Historical: Financial accounting records assets and liabilities at their historical cost. It ignores the fact that assets or liabilities may have a different market value as of the date of reporting.

2. Does not account for inflation: Financial accounting, as I have previously mentioned, only record transaction at historical cost. 

Money, as we all know, does not have a stable value. This raises serious doubt about the accuracy of the balance sheet record because these assets are not always adjusted for the effect of inflation.

3. Non-financial Items: As per the money measurement concept, and accountants are required to record only those transactions that can be measured in terms of money.

This means that important items like employee commitment, manager devotion, market competition are not accounted for in the financial statement.

You'll agree with me that this nonfinancial item has a large impact on the profitability of the business.

4. It is not forward-looking: Financial accounting kept track of transactions on a historical basis. 

This means that financial accounting information is only useful on a historical basis.

As a result, financial accounting is not forward-looking since it lacks the information necessary for efficient planning that managers require.

5. Inadequate loss analysis: Unlike cost accounting, financial accounting does not provide adequate loss analysis.

Cost accounting, for example, can distinguish between avoidable and unavoidable waste, whereas financial accounting cannot.

6. There isn't a lot of information about the department's cost and expenses: Financial accounting is usually aimed at determining the net result of the business as a whole.

When it comes to departmental or unit basis, financial accounting offers little or no use.

This is because it does not provide detailed information on the cost incurred by each department of the organization, nor does it provide information on the cost per unit produced.

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7. Inability to account for breakeven quantity: The break-even quantity is the quantity at which no profit or loss is realized.

Because the information in financial accounting isn't designed to do so, it can't be utilized to calculate the break-even quantity.

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