MDU BBA NOTES

SEMESTER-1

Financial Accounting

Nature of Financial Accounting

Objectives of Accounting

The primary objectives of accounting include the following:-

Maintenance of Records of Business Transactions

Accounting is used for the maintenance of a systematic record of all financial transactions in the book of accounts. Even the most brilliant executive or manager cannot accurately remember the numerous amount of varied transactions such as purchases, sales, receipts, payments, etc.

Calculation of Profit and Loss

The owners of businesses are keen to have an idea about the net results of their business operations periodically, i.e. whether the business has earned profits or incurred losses. Thus, another objective of accounting is to ascertain the profit earned or loss sustained by a business during an accounting period.

Report of Financial Position

Accounting also aims at ascertaining the financial position of the business concerned in the form of its assets and liabilities at the end of every accounting period. A proper record of resources owned by the business organization (Assets) and claims against such resources (Liabilities) facilitates the preparation of a statement known as the balance sheet position statement.

Providing Accounting Information to its Users

The accounting information generated by the accounting process is communicated in the form of reports, statements, graphs, and charts to the users who need it in different decision situations. As already stated, there are two main user groups, viz. internal users, mainly management, who need timely information on cost of sales, profitability, etc. for planning, controlling, and decision-making, and external users who have limited authority, ability, and resources to obtain the necessary information and have to rely on financial statements (Balance Sheet, Profit, and Loss account).

Nature of Financial Accounting

The main Nature of Financial Accounting is as follows:-

Accounting as a service activity

Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that are intended to be useful in making economic decisions, and in making reasoned choices among alternative courses of action. It means that accounting collects financial information for various users for taking decisions and tackling business issues.

Accounting in itself cannot create wealth though, if it produces information that is useful to others, it may assist in wealth creation and maintenance.

Accounting as a profession

Accounting is very much a profession. A profession is a career that involves the acquiring of a specialized formal education before rendering any service. Accounting is a systematized body of knowledge developed with the development of trade and business over the past century.

Accounting as a social force

In the early days, accounting was only to serve the interest of the owners. Under the changing business environment, the discipline of accounting and the accountant both have to watch and protect the interests of other people who are directly or indirectly linked with the operation of modern business. Society is composed of people as customers, shareholders, creditors, and investors. The accounting information/data is to be used to solve the problems of the public at large such as determination and controlling of prices.

Accounting as a language

Accounting is rightly referred the “language of business”. It is one means of reporting and communicating information about a business. As one has to learn a new language to converse and communicate, so also accounting is to be learned and practiced to communicate business events.

Accounting as science or Art

Science is a systematized body of knowledge. It establishes a relationship between cause and effect in the various related phenomenon. It is also based on some fundamental principles. Accounting has its own principles e.g. the double entry system, which explains that every transaction has two-fold aspects i.e. debit and credit. It also lays down the rules of journalizing. So we can say that accounting is a science.

Accounting as an information system

Accounting discipline will be the most useful one in the acquisition of all business knowledge in the near future. You will realize that people will be constantly exposed to accounting information in their everyday life. Accounting the information serves both profit-seeking businesses and non-profit organizations.

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