PURPOSES OF FINANCIAL ACCOUNTING

Financial accounting has the following purposes:

(1) To know the profit and loss of an entity.

Financial accounting provides financial information used to ascertain the profit or loss of an entity. Profit is the major motivator to an entrepreneur. It is a yardstick for business success. Loss, on the other hand is a major demotivator to a business owner and directors of a company. If a company fails to make profit for the periods of five consecutive years, the business owner(s) may decide to leave the business.

 But how will the entrepreneur know that his business is making profit? Or if the opposite occurs, loss? It is through adequaate, reliable and verified accounting information. For a financial information to be adequate and reliable, it is necessary for the business owner to keep daily records of accounting data.

(2) To ascertain the Turnover.

Business makes sales on a daily basis. Infact, sales or turnover or income can be seen as the blood of a business. Without blood pumping regularly from the heart of a human being or an animal may be in coma or die. Also, without revenue flowing into the business, the entity will fail. It will result in liquidation or bankruptcy of the business. The business may not be able to meet it liabilities as they fall due. Therefore, data must be kept on a daily basis for turnover earned.

(3) To determine expenses.

Expenses are incurred everyday in a business. Expenses can be liken to food we eat everyday. Without food for a day or two, we will become short of blood. Also failure by a business to incure expenses, may result to the company to loss says. How so?

For example, failure to give out cash discount and quantity discount may result to non payment of cash owed to the business by it’s customers or may result to loss of sales to competitors or are providing this services. Also, failure by a company to pay for electricity and feuling may lead to low productivity and inefficient use of empoyees and other factors of production. It is necessary for the company to maintain

(4) To identify assets.

Assets are the properties of a business. Assets are the whole structure of an entity. Without them, we may not identify a business. Assets can be seen as the whole structure of the body. From the head to the toe, from the heart through the vain to the liver an intestine are the assets we have. So also, from the name of the company to the building of the company and from the inventory of the entity to it’s cash and cash equivalent are assets of a company.

Non current assets and current assets are the major types of assets in a company. Non current assets are the bony structure of a company while current assets are the heart, liver and intestine of the busines. Current assets is more regarded as the heart of the business because without them revenue (blood) will not flow into the business.

A record  of all the assets of a company is necessary for a business. The enterprise should also identify their assets physically either individually or collectively.

(5) To determine the liabilities.

Liabilities are claim against a business. Liabilities are not within a business but are external to the business. A business liabilities can be classified into  non current liabilities and current liabilities. They can be said  to be assistance we received from others that make us feel indebted to them.

Liabilities must be paid, unless, the business will be sued for non payment which will lead to ceasure of assets or liquidation the company. Entities ensure that they keep regular records of their business liabilities. This  will enable them to now those that have claims in the business.

(6) To know the amount of equity.

Equity is the fund invested by the owner(s) of an entity. It is generally called capital. The amount of equity must be recorded to differentiate it from other sources of fund of a business. Equity is the breath of the business. When God created man, he breath into him for the man to become a living body. An entity will not be in  existence, if the capital is not introduced into it. know the profit and loss of an entity.

For Futher reading:

Needs for accounting information

Objectives of business entity

Reasons why small business fail-marketing

Five reasons that will make you start your own business

How to optimize cash.