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What Purposes Are Served By Financial Accounting?

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QUESTION : WHAT PURPOSES ARE SERVED BY FINANCIAL ACCOUNTING? Accounting is a very ancient art and has also been described as the `language of business'. The essential purpose of accounting is to communicate to interested users the economic measurements and quantitative information of a business enterprise which will act as a basis for performance assessment, decision making and control. This is done through the process of identifying, summarizing, analyzing, measuring, recording, reporting and interpreting business transactions. So, who are the suppliers of the accounting information? In the private sector of the economy, they are the sole traders, partnerships, clubs and societies, and the limited companies. In the public sector of the economy, they include local authorities, nationalized industries, state colleges and the health service. These ones will provide information in the form of accounting statements or final accounts which consist of a Profit and Loss account, and a Balance Sheet. ...read more.


Potential shareholders are interested in the present and future activities of the business because they can either boost the revenue of the business or reduce it and thus the amount of predicted dividends they will get. They can also use the information in the financial statements to compare the company's past earnings, earnings per share, likelihood of future growth, dividends and profits with other companies in the same industry. If the financial statements of that business gives a favourable view, it could encourage new investors. If not, it will discourage them. The providers of loan and finance will usually need to look into the company's financial statements before they extend the company any credit. The accounting information helps them to decide whether to make an initial advance, and to monitor the company's progress and ability to pay back at the end of the loan period. The company's liquidity position and its creditworthiness is also considered. ...read more.


Then, we have the adviser group, there are the financial analysts, journalists, statisticians, researchers, trade unions, stockbrokers and credit-rating agencies who might also require to look into the financial statements of the company. The public too, are sometimes interested in the activities of business. For example, there are environmentalists who are particularly concern about how the business functions, whether its activities are affecting the nature of the earth. Pollution of all kinds which result from the activities is not shown in the financial accounts of the business but it is a social cost to the public. Thus, sometimes the government is asked to take action against them if they are polluting the environment. Different users require different information from the financial statements even though they may share a common interest in the accounts of the business. Therefore, financial accounting serves different purposes for different users. On the whole, the financial statements set out should be relevant, condensed, useful, timely, reliable, giving a true and fair view of the business. ...read more.

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