Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit’. This Conceptual Framework is discussed in detail within chapter 3. Therefore, the motivation for all accounting is to provide information, financial or otherwise, that can assist the users of financial statements in their economic decision-making. While there are many definitions of accounting worldwide, provided by various accounting bodies, all tend to have the following elements in common.
That is that financial accounting is a process which is undertaken with the ultimate aim of: Identifying Measuring Communicating information to the users of accounting information, in order to allow them to make informed judgments and decisions. The information which is identified, measured and communicated is largely financial in nature. The identification of information is undertaken in the bookkeeping process – covered in Financial Accounting. Here transactions are identified and recorded in the books and records of the business entity via the double entry system of bookkeeping.
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At year-end or month-end, information is extracted from the double entry bookkeeping system and is measured, presented and communicated in a manner that is more understandable to the users of accounting information – for example in the Statement of Comprehensive Income the prime piece of information measured and communicated is whether the entity made a profit/loss in the period covered by the Statement Of Comprehensive Income. While in the Statement of Financial Position, information relating to the assets and liabilities and the ultimate financial position of the business entity is measured and communicated.
Financial Accounting focused on the following areas: Measuring the financial performance of a sole trader via the Statement of Profit and Loss and the Statement of Financial Position. 8 Identification and recording of financial information – this is achieved via the double entry bookkeeping system which records transactions. Accounting procedures such as the preparation of control accounts and bank conciliation statements ensure that the information contained in the double entry system is accurate.
Items in the control accounts or bank reconciliation for which there is inadequate information are initially recorded and subsequently corrected via a suspense account. This suspense account is a working account that must be cleared before the financial statements are published. (A suspense account should never appear in either a Statement of Profit and Loss or Statement of Financial Position). Communicating by preparing the financial statements of a sole trader or a not-for profit organization.