what is accounting? explain it's main characteristics
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Financial Accounting and its characteristic features
MBA finance >> General Accounting
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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 Profit and Loss Account and second is Balance Sheet.
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.
• What is accounting?
Accounting is an art of recording, classifying and summarising in a significant manner and in terms of money, following the principles of accountancy, the transaction and events which are atleast of a financial character and interpreting the result thereof.
• What are the characteristics of accounting?
1) Identification of financial transactions and events :: This involved identification of those transaction and events which are a part of economic activity or related to business and can be measured in terms of money. Those transactions which can't be measured in monetary terms are not included considered in accounting.
2) Measuring of identified transactions :: This involves measuring all the identified transactions in term of a common measuring unit i.e the currency of the country.
3) Recording :: Now the business transactions of financial character needs to be recorded in the books of original entry i.e Journal. Journal is further subdivided in sub-books such as cash journal, purchase journal and sales journal or cash book, purchase book and sales book etc.
4) Classification :: It is the process of grouping financial transactions or entries of one nature at one place. The transactions recorded in Journal is posted to the main book of accounts which is Ledger. This book contains individual accounting heads under which all financial transactions of a similar nature are collected.
5) Summarising :: This involves presenting the classified data in an understandable and meaningful manner which is useful for external as well as internal users.
6) Analysing and interpretation :: This process is done so that the users of financial data can make a meaningful judgement of financial position and profit earned, loss incurred by business in specific period of time which is helpful to plan future in better way.
7) Communication :: Now it's time to communicate financial information of its users. Accounting information must be provided in time so that appropriate decision may be taken at right time.