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  Meaning of Financial Accounting

Meaning of Financial Accounting

Financial Accounting aims at carrying out the results of an accounting year in terms of profits or losses and assets and liabilities. To do this, it is necessary to record several transactions in a systematic manner. Financial Accounting is described as, 'Art and science of classifying, analyzing and recording business transactions within a systematic way in order to arrange a summary at the end of the year to observe the results of the concerned accounting year.' The definition provided above is self explanatory, though for understanding clearly, the following terms are described below.

A. Business transactions :-

 The meaning of the transaction is an activity; so a business transaction means any activity that makes some type of legal relationship. For instance, purchase and sale of goods, paying employee salary and appointing an employee, payment of several expenses, purchase of assets etc.

B. Classification of transactions :-

Before recording any transaction, it is necessary that it is to be classified. A transaction can be classified like cash transaction and credit transaction. Likewise transactions of receiving income and payment of expenditure can be separated. Even in case of expenditure, transactions including revenue expenditure and capital expenditure can be separated.

C. Recording of transactions :-

The heart of financial accounting is recording of transaction. In accounting language, recording of the transaction is termed as entry. There are well described rules for recording several transactions in the textbooks of accounts. According to the rules of financial accounting, each and each transaction is recorded at two places and therefore it is termed as 'Double Entry' system of accounting.

D. Summary of transactions :-

After recording all transactions, it is necessary to ready a summary of them so as to draw meaningful conclusions. The abstract will assist in finding out the Profit/Loss of a specific year and also determining Assets and Liabilities on a specific date. Actually, the purpose of financial accounting is to know the results of a specific year. According to this angle, the process of preparing the summary is very important.

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