Financial Accounting Notes


What is financial accounting:

Some people think accounting as a highly technical field, which is practiced and understood only by professional accountants.

Accounting is the art of interpreting, measuring, and communicating the results of economic activities.

Whether you are paying your phone bill, or you are balancing your checkbook, you are working with accounting concepts and accounting information.

Purpose of accounting:

The basic purpose of accounting is to provide decision-makers with information useful in making economic decisions. These decisions concern the allocation and use of economic resources, such as money, land, and labor. The manner in which we allocate these resources shapes the world’s economies. Resource allocation decisions determine prices, wages, the goods and services we produce, the adequacy of our food supplies, the quality of our transportation system, and which countries will prosper or suffer economic decline.
Just as there are many different types of economic decisions, there are many types of accounting information. These are:

1.Financial accounting:

This term refers to information describing the financial resources, obligations and activities of an economic entity. It is designed primary to assist investors and creditors in deciding where to place their investment resources.

2. Management Accounting

Management accounting involves the development and interpretation of accounting information intended specifically to aid management in running the business. Managers use this information in setting the company’s overall goals, evaluating the performance of departments and individuals, deciding whether to introduce a new line of products and in making virtually all types of managerial decisions.

3. Tax accounting:

The preparation of income tax returns is a specialized field within accounting. To a great extend, tax returns are based upon financial accounting information.
The most challenging aspect of tax accounting is not the preparation of an income tax return but rather tax planning.

Tax planning means anticipating the “tax effects” of business transaction and structuring these transactions in a manner that will minimize the income tax burden

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