Definition of Financial Accounting
Involves two related functions - the recording of transactions and the preparation of financial statements. A transaction is any activity involving money. Running, dancing and taking a bath are all activities. Such activities become a transaction in accounting terms only if there is a payment involved.
A business engages in numerous transactions, such as when it buys and sells goods and pays rent and salaries. The transactions are recorded in books of account and this recording is referred to as bookkeeping.
Why does a business need to keep accounting record?
- To prevent cash and other assets such as property, vehicle and inventory from being stolen or improperly used.
- To monitor the cash available to business, checking whether there is enough to pay bills on time.
- To keep checking whether the business is doing well - that is whether there is sufficient reason for continuing to carry on with the business.
- To satisfy the tax inspectors.
Reference : Financial Accounting : An Introduction by Augustine Benedict & Barry Elliott
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