Nature And Purpose Of Financial Accounting

Human endeavors employing resources which are quantifiable in monetary terms for gain. business activities may be conducted by single individuals known as sole traders (or sole proprietors). sometimes, individuals may come together and contribute resources to jointly conduct business activities under an arrangement known as partnership. The most complex form of organizing business activities is a company which is an entity incorporated. Earlier in human development, business activities tended to be carried out in the form of sole proprietorships and partnerships. only very few companies existed then. As human society became more advanced and complex, companies grew in number to the extent that, in modern times a typical companies is able to do more business than several sole proprietorships and partnerships put together.

The accounting profession has also grown in complexity, as the business community it serves evolved from very rudimentary form of book keeping of 14th century to the very advanced form in modern times which benefit from the tremendous advances in information and computer technology. Despite the advent of computerization, the underlying nature, principles and purposes of accounting have remained largely unchanged.

in order to properly explain the nature and purpose of accounting, it would be necessary to dwell on its salient features which include the following:

* Provision Of Information : The essence of accounting is to provide information regarding the value of resources employed, assets and liabilities of the business , profitability or otherwise of the business enterprise ans so on. Accounting is of little use if it does not provide timely, relevant and sufficient information to those who require the information. The users of accounting information include owners and managers of the business. creditors, lenders,customers, government, through agencies such as the tax authorities and the corporate Affairs commission.

* The Business Enterprise as a Separate Entity : In order to accurately measure the performance of a business venture, accounting regards the enterprise, irrespective of its legal form, as a separate entity from those who have proprietary or economic interest in it.it is very easy, particularly in a sole proprietorship and a partnership, to mix up the personal transactions of the owners with those of business. When that happens, it becomes difficult or sometimes impossible to accurately measure how well or badly the business enterprise is doing. For example, if accounts of a sole proprietorship show that a net loss of $5,000 has been incurred during a particular period after deducting. among other expenses, the owner’s personal rent of $4,000 and the cost of repairing the owner’s deep freezer amounting to $2,000, this would be clearly misleading. The rent of $4,000 and the repair cost of $2,000 were not incurred for the purpose of the business, but for personal benefit of the owner. Lumping the above stated expenses which are official and personal together with the amount to treating the business enterprise and its owner as one entity.

The expenses should have been separated from the others incurred for the business, in accordance with the entity. Had this been done, the accounts of the firm would have indicated a net profit of $1,000 instead of a net loss of $5,000. if the business enterprise is to prosper and continue in existence for the foreseeable future, it is necessary that the owner takes measures to discontinue or modify whatever he or she is doing which is unconventional. The businessman can do this only when there is accurate information, the profit or loss which the enterprise makes. A strict application of this principle will ensure that the private or personal assets,liabilities, income and expenses of the owners are now respectively recorded-in the books of the enterprise-as assets,liabilities,income and expenses of the business. This will ensure that answers are provided to the following questions as accurately as possible;
> How much is the profit or loss made by the enterprise during the period under review
> What is the value of assets employed and liabilities incurred in running the business during the period.

The entity issue is not much of a problem in the case of a company unless the accountant or the book-keeper suffers from serious incompetence or is aiding or abetting a fraud. This is due to the fact that under the law a company has a personality quite distinct from that of its owner. on the other hand, in a sole proprietorship or a partnership, the law does not regard the enterprise as having a personality separate from the personality of its owners.

* Accounting Mainly Records Financial Items And Transactions : Accounting records only items/transactions that are quantifiable in monetary terms as Doll and cent. This is a major shortcoming of accounting in that non-quantifiable information also know as qualitative information are sometimes just as important as quantitative information in assessing the well being of an enterprise. This is the reason why users of accounting information usually take cognizance of the relevant qualitative factors before acting on accounting information.

The most important asset needed by an enterprise to achieve its objectives is an efficient and well motivated workforce. This asset does not however appear on the balance sheet of the enterprise and is not included in the assets employed, despite the fact that the labor of the employees is indeed employed in the operations of the enterprise during the period. The reason for this is the obvious fact that it is very difficult to put a financial value on human beings. users who require information on the quality of the enterprise of the workforce of the enterprise therefore have to look for it elsewhere.