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Financial Accounting-I




                    Notes          1.4 Functions of Accounting

                                   The main function of accounting is to record the business transactions scientifi cally  and
                                   systematically. Apart from this, there are other functions of accounting which are as follows.
                                   1.   It depicts the true and fair picture of the financial position of the company.


                                   2.   It helps in ascertaining profit or loss of the business which is the only primary aim of the
                                       business.
                                   3.   It helps in future decision-making by different persons interested in such accounting
                                       information.
                                   4.   It depicts the earning capacity of the business.
                                   5.  It satisfies all Government rules and regulations connected with Accounting information

                                       such as all the companies are required to prepare their statements as per requirements of
                                       the Indian companies Act, 1956, amended upto date.

                                   1.5 Users of Accounting Informations

                                   There are two types of persons interested in  financial statements: (1) Internal users, and

                                   (2) External users.
                                   1.   Internal Users: These are: (a) Shareholders, (b) Management, and (c) Trade unions
                                       employees etc.
                                       (a)   Shareholders are interested to know the welfare of the business. They can know the
                                            operational results through such financial statements and the financial position of


                                            the business.
                                       (b)   Management is interested to take important decisions relating to fixing up the selling

                                            prices and making future policies.
                                       (c)   Trade unions and employees are interested to know the operational results because their

                                            bonus etc. is dependent on the profit earned by the business. Financial statements
                                            also help in their negotiations for wages/salaries.
                                   2.   External Users: The following are most important external users of fi nancial statements:

                                       (a)   Investors: They are interested to know the earning capacity of business which can be

                                            known through financial statements. They can also know the financial soundness of

                                            the business through fi nancial statements.
                                       (b)   Creditors, Lenders of Money etc: The creditors and lenders of money etc. can also know

                                            the financial soundness through financial statement. They have to see two things (i)

                                            Regularity of income and (ii) solvency of the business so that their investment is risk
                                            free.
                                       (c)   Government: Government is interested to formulate laws to regulate business activities
                                            and also law relating to taxation etc. Financial statements help while computing
                                            National Income statistics etc.

                                       (d)   Taxation authorities: Financial statements provide information relating to operational
                                            results as well as financial position of the business. Tax authorities decide the amount

                                            of tax as  per financial statement. It is very useful to other taxation authorities such as

                                            sales tax etc.
                                       (e)   Stock Exchanges are meant for dealing in share/securities. Purchase and sale of such
                                            shares and securities are possible through stock exchanges which provide fi nancial
                                            information about each company which is listed with them.



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