What Purposes Are Served By Financial Accounting?

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         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.  The Cash Flow Statement is also sometimes a required accounting statement in annual reports.

        In general, the financial statements are prepared in a summarized form because too much detail is of little interest to the users and it is likely to obscure the important trends. In addition, a too detailed information might be used by competitors to find out the company’s strengths and weaknesses.

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        There are two kinds of  users of these financial statements. They are the internal users and the external users. The internal users are more concerned about the management of the business and will require management accounting. As for the external users, they will require financial accounting which will be discussed in greater detail in this essay.  

        The purpose of financial accounting varies among the external users. There are a number of external user groups. Each group, although they have a common interest in the company’s accounts, they use the information provided as a basis for a quite ...

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