In the wonderland of Finance

• Accounting, simply put, is measuring all the Financial transactions/activities of Firm/individual and
prepare meaningful and informative reports/statements from them.
• Financial accounting can be made in two approaches – Preparer approach and User approach.
Preparer approach is used by Accountants whereas End user approach is for all other users.
• Accounting results in the below mentioned reports/statements:
1. Trail balance
2. Profit and Loss Accounts
3. Balance Sheet
4. Cash Flow
5. Ratio analysis
• Accounting statements are necessary for the following:
Creditors/Lenders, Shareholders, Suppliers of goods and services, Employees, Government,
Investment analysts & researcher and accounting students.
Purchase, production, sales, loans, profit, loss, stocks, bills, debtors, creditors, cash, bank balance
are some of the most frequently used terms in Financial accounting.
• Accounting measures net-worth, profitability, efficiency, respectability, solvency, brand equity and
goodwill. Business decisions are usually not right when they are not financially right.
• Principles of accounting:
1. It is a science as well as art
2. It considers only historical costs but not market value
3. Only monetary transactions are recorded
4. Consistency in principles to be followed while using
5. It is conservative in nature (Unrealized loss is provisioned for whereas unrealized profit is taken into
account)
6. Owner and firm are considered two separate entities
7. Business is treat as an on going concern

• Limitations of Financial accounting:

Profit is the result of valuation and valuation is subjective. Hence, profit is considered fiction until it realizes
into cash. Only monetary value and quantitative aspect of all transactions are recorded whereas qualitative
aspects are ignored. Inflation is not adjusted and replcement costs are not considered.