Finance Accounting

Purpose of Financial statement

• Financial statement shows financial details of the company like profit earned, assets, and retained earnings for both internal and external users who so ever are interested in the financial statements of the company.
• Investors invest in the company after analyzing the financial statement of the company. Firms with more assets and profits will attract more investors. Therefore, this is a win-win situation for both investors as well as for the firm.
• Lenders/Creditor prior to extending loans thoroughly checks the financial statements of respective companies and then make decisions related to extending or restricting their credit requirements.
• Taxation is imposed by the government on the basis of the revenue and assets of the company. Hence, the real position is displayed by the financial statement thus charged tax accordingly.
• Financial statements help in making external comparisons (between different firms) as well as internal comparisons (within the firm).

2. Regulation Related to Finance

Stakeholders of the company are the users of financial statements. They access financial statements for their personal interest like investment/purchase share of a particular company, providing credit to the company, purchase products, etc. Moreover, the main concern of users is that they get useful, reliable, and relevant data as a base for future actions. Taking into consideration the requirements of users, the government has developed a regulatory framework known as GAAP (General Accepted Accounting Principle). It is a standard method that involves concepts, rules, or principles, which ensure the financial statement of the company is transparent, reliable as well and consistent (Fourie, 2015).

There are three regulatory/financial standards in the UK

Financial policy committee: It checks financial statements as a whole. Its work is to manage risk associated with the stability of the firm. Hence, they are responsible for macroeconomic regulation.

Prudential regulatory authority: These authorities are responsible for microeconomic regulation. Their objective is to safeguard the interest, safety, and financial strength of the firm by reducing external factors that have negative effects on the firm.

Financial conduct authority: The financial conduct authority's responsibility is to conduct business regulation, safeguard the interests of investors, and promote competition for customers. They have additional power like withdrawing existing products or imitating products as well and they can stop the functioning of any firm, which provides misleading data to an outside party.

3: Accounting Rules and Principles

Accounting rules: Accounting is a dual entry system, which affects two accounts one is a debit account, and the other one is a credit account. There are three rules of accounting personal account, real account, and nominal account (Hall, J. A., 2012).

Personal account: It includes an account of a human being (sole proprietor, debtor) and an artificial independent body (company, bank). As well as accounts of group persons like drawing accounts, prepaid salary accounts,s, etc. Hence, the golden rule for a personal account is "debit the receiver and credit the giver".

Real account: A real account is a part of an impersonal account that includes a firm's tangible assets (machinery account, cash account) and intangible assets (patent account, goodwill account). The golden rule for real accounts is "Debit what comes in, credit what goes out"

Nominal account: Nominal is again a part of an impersonal account that includes all fictitious accounts like expense, revenue, gain, and loss of firm. Such as traveling expenses account, advertisement expense, commission paid, and rent received account. The golden rule for a nominal account is "debit all expenses and losses, credit all income and gain".

Accounting principles

Economic Entity: Businesses and businessmen are two separate legal entities. So it is duty of accountant to separate the account of the business owner from the business. Like drawings are the liability of the business owner.

Monetary measurement: Accountants of firms record only those transactions that can be displayed in terms of money. There can be nonmonetary transactions that are important for business but can't become part of financial transactions.

Historical cost principle: The value of assets keeps on changing with time. Moreover, it is the duty of accountant to update only the price on which assets were taken or brought into the firm. Firms don't have to do anything with the current value of the asset. Their further valuation takes place on the basis of historical prices.

Full disclosure of account: Any relevant information to stakeholders must be displayed in the books of the firm. This principle makes sure that stakeholders don't get manipulative or misleading data as well as it ensures firms don't hide any relevant entries.

Going concern principles: This principle says whenever a firm operates, it operates with life lifelong running perspective. In case the accountant comes to know that the company can't continue anymore then this information must also be disclosed in their s

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