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Financial accounting is subjective not objective accounting essay

  • At the most it can reveal what has happened so far, but it cannot exercise any control over the past happenings;
  • The limitations of financial accounting are as follows;
  • The objectivity principle is aimed at making financial statements more relevant and reliable.

Hire Writer It is not possible to remember all transactions ofthe business. The recorded data is arranged in a manner so as to group the transactions of similar nature at one place so that full information of these items may be collected under different heads.

  1. Financial accounting is like a post-mortem report.
  2. Cost figures are not known in advance.
  3. The objectivity principle is aimed at making financial statements more relevant and reliable.
  4. No answer to these questions.
  5. A person not conversant with accounting has little utility of the financial accounts.

To verify the arithmetical accuracy of such accounts, trial balance is prepared. The classified information of the trial balance is used to prepare profit and loss account and balance sheet in a manner useful to the users of accounting information.

Objectivity Principle

The final accounts are prepared to find out operational efficiency and financial strength of the business. It is the process of establishing the relationship between the items of the profit andloss account and the balance sheet. The purpose is to identify the financial strength and weakness of the business. It also provides a basis for interpretation.

Interpreting the financial information: It is concerned with explaining the meaning and significance of the relationshipestablished by the analysis. It should be useful to the users, so as to enable them totake correct decisions. The profitability and financial position of the business as interpreted above arecommunicated to the interested parties at regular intervals so as to assist them tomake their own conclusions. Financial accounting is concerned with the preparation of final accounts.

  • After six months of working at the firm, he is assigned to the head auditor position on the Fisher Corp audit;
  • The two concepts of relevance and reliability encompass the objectivity principle;
  • The profitability and financial position of the business as interpreted above arecommunicated to the interested parties at regular intervals so as to assist them tomake their own conclusions;
  • It is not helpful to the management in taking strategic decisions like replacement of assets, introduction of new products, discontinuation of an existing line, expansion of capacity, etc;
  • It should be useful to the users, so as to enable them totake correct decisions.

The business has become so complex that mere final accounts are not sufficient in meeting financial needs. Financial accounting is like a post-mortem report. At the most it can reveal what has happened so far, but it cannot exercise any control over the past happenings. The limitations of financial accounting are as follows: It records only quantitative information. It records only the historical cost. The impact of future uncertainties has no place in financial accounting. It does not take into account price level changes.

Concept, nature and limitation of financial accounting Essay

It provides information about the whole concern. Product-wise, process-wise, department-wise or information of any other line of activity cannot be obtained separately from the financial accounting. Cost figures are not known in advance. It does not provide information to increase or reduce the selling price. As there is no technique for comparing the actual performance with that of the budgeted targets, it is not possible to evaluate performance of the business.

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It does not tell about the optimum or otherwise of the quantum of profit made and does not provide the ways and means to increase the profits. In case of loss, whether loss can be reduced or converted into profit by means of cost control and cost reduction?

Financial accounting does not answer this question. It does not reveal which departments are performing well?

Which ones are incurring losses and how much is the loss in each case? It does not provide the cost of products manufactured 11. There is no means provided by financial accounting to reduce the wastage.

Can the expenses be reduced which results in the reduction of product cost and if so, to what extent and how? No answer to these questions. It is not helpful to the management in taking strategic decisions like replacement of assets, introduction of new products, discontinuation of an existing line, expansion of capacity, etc.

It provides ample scope for manipulation like overvaluation or undervaluation. This possibility of manipulation reduces the reliability. It is technical in nature. A person not conversant with accounting has little utility of the financial accounts.

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  1. If management or current shareholders wrote reports and audits, they would tend to be too optimistic and not rely on pure facts.
  2. It does not provide information to increase or reduce the selling price. Although auditors must adhere to GAAS, auditors must be independent of the company they are auditing.
  3. The limitations of financial accounting are as follows. Hire Writer It is not possible to remember all transactions ofthe business.