Meaning And Nature Of Financial Accounting

Accounting is a social science. The nature of accounting information has been dictated from time immemorial by the needs of the users of the day. The history of accounting reflects the pattern of social developments and the forces which necessitate the changes in accounting system from time to time. Over the years accountancy has made tremendous progress in the field of commerce and industry. Accounting can be described as being concerned with measurement and management. Measurements of recording transactions and management with the use of data for making decisions are the two fundamental aspects.  Accounting function is vital for every entity of the society whether individuals, house wives, business entity, nonprofit making organizations like municipalities, panchayats, clubs, etc. All are required to maintain accounts.  Accounting is commonly referred to as the “language of the business” as it is effectively employed to communicate the financial performance of business to various interested parties or stakeholders. It is concerned with the measurement and communicating financial data.

Financial Accounting is based on double entry system of accounting which comprises of

• Recording of business transactions in the books of prime entry,
• Posting into respective ledger accounts,
• Striking balance, and
• Preparing the performance statement (profit and loss statement) and position statement (balance sheet).

Financial Accounting is concerned with the collection, recording, classification and presentation of financial data to serve the purposes of the management, shareholders and stakeholders, such as, creditors, bankers, Government, etc.

The nature and purpose of accounting

The basic aim of accounting in a business entity is to provide financial information for making decisions on its activities. Managers of an economic entity at various levels require analyzed financial information for planning and programming, for controlling expenditure, for ascertaining the extent of profitability or otherwise of a department – even of each production item for undertaking new jobs, etc.  Financial information in tabular forms and with graphs and charts are also required by the outsiders, namely, bankers, financial institutions, creditors, investors, government agencies and even by the labour unions and the general public who have some interest in the particular business concern.