Page 8 - DCOM101_FINANCIAL_ACCOUNTING_I

Financial Accounting-I

Notes 1.1 Need of Financial Accounting

A well known author of Accounting, [Prof. R.R. Gupta, Principal, Poddar College, Nawalgarh
(Rajasthan)] wrote in …..”First write/record before one delivers goods or renders the services
and if there is any disagreement in future, use the writing or record as an evidence to resolve the
misunderstanding or rectifying the error.”
Recording of business transactions is necessary from owners’ point of view and other interested
party as well. The persons included in the second category are the suppliers of the materials,
products and services to the business, the government and the society at large. The creditors
(suppliers who are willing to take their payment later) are interested to know whether the
business will be able to pay them later (solvency of the business) whereas the government wants
to know whether the business has paid whatever was due to them in terms of taxes, fees etc.
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Did u know? What are the purposes of preparing fi nancial statements?
1. Accounting provides necessary information for decisions to be taken initially and it
facilitates the enterprise to pave way for the implementation of actions
2. It exhibits the financial track path and the position of the organization.

3. Being business in the dynamic environment, it is required to face the ever changing
environment. In order to meet the needs of the ever changing environment, the policies
are to be formulated for the smooth conduct of the business.
4. It equips the management to discharge the obligations at every moment.

5. Obligations to customers, investors, employees, to renovate/restructure and so on.

1.2 Objectives of Accounting

The main purpose of book-keeping and accounting is to furnish the necessary fi nancial data to
the persons interested in the business. In brief, following are the objectives of accounting:

1. To maintain the systematic records of the business: The primary objective of the accounting
is to maintain the records of all transactions of the business. As the memory of human
being is very limited and short, it would be very difficult to remember all the transactions

especially if there is a huge amount of transaction. So it is very necessary to record all
business transactions properly to determine the amount of profit or loss and the fi nancial

position of the business on a particular date.
2. To ascertain the profit or loss of the business: The main objective of the business is to earn a

profit. The profits are calculated with the help of financial accounting. Financial accounting
helps to determine the net profit or loss of the business over a period. To calculate the

amount of profit or loss, a trading and profit and loss account is prepared at the end of

a period. If the revenue for a period are more than the expenses incurred to earn that

revenue then it is said to be a profit and on the other hand if the expenses are more than the
revenues for a period then it is said to be a loss. In the case of profit, the management can

take the relating to selling price and output etc.

3. To present the financial position of the business: The objective of the accounting is not

only recording of the financial transactions of the business and determination of profi t
or loss but also to present the financial position of the business. To present the fi nancial

position, financial accounting helps in the preparation of balance sheet. Balance sheet is the

statement of assets and liabilities of the business. It also gives the information about the
borrowed capital as well as owned capital along with different assets such as fi xed assets,
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