What do u mean by financial accounting ? Explain its limitations and importance.
Answers
MEANING :- Financial accounting is the process of preparing financial statements that companies’ use to show their financial performance and position to people outside the company, Including investors, creditors, suppliers, and customers.
IMPORTANCE :-
1. External users may include suppliers, banks and leasing companies etc. who are not part of the company but require all this information to analyze the progress of the company and compare it with their expectations.
2. The financial statements generated by all companies are comparable, providing a standard method of analysis.
3. Constitute the internal users of the information generated by financial accounting practices.
LIMITATIONS :-
1. Transactions are initially recorded at their cost. This is a concern when reviewing the balance sheet, where the values of assets and liabilities may change over time.
2. A user of financial statements can gain an incorrect view of the financial results or cash flows of a business by only looking at one reporting period.
3. If a user wants to compare the results of different companies, their financial statements are not always comparable, because the entities use different accounting practices.
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