Financial Accounting - Theoretical Framework

Financial Accounting : ( notes )

Unit 1 – Theoretical Framework :



*1. Define Accounting.*

Accounting is the process of recording, classifying, reporting, and analyzing financial
information of a business.



*2. Four Objectives of Accounting:*



1. To record financial transactions

2. To classify and report financial information

3. To analyze financial performance

4. To provide information for decision-making



*3. Three Limitations of Accounting:*



1. Subjectivity in accounting estimates

2. Ignoring non-monetary transactions

3. Assuming a going concern



*4. Accounting Information.*

Accounting information refers to financial data and reports used to make informed
decisions about a business.



*5. Accounting Information System (AIS).*

AIS is a system that collects, processes, and reports financial data to support decision-
making.

, *6. Users of Accounting Information:*



1. Investors

2. Management

3. Creditors

4. Government

5. Employees



*7. Accrual Basis of Accounting.*

Accrual basis recognizes revenues and expenses when earned or incurred, regardless of
cash flow.



*8. Cash and Accrual Basis of Accounting.*

Cash basis recognizes revenues and expenses when cash is received or paid. Accrual basis
recognizes revenues and expenses when earned or incurred.



*9. Three Advantages of Cash Basis:*



1. Simple to implement

2. Matches cash inflows and outflows

3. Easy to track cash flow



*10. Accounting Principles.*

Accounting principles are guidelines that ensure consistency and comparability in financial
reporting.