Question

Explain the purpose of financial recording.

Answer 1

1. Systematic maintenance of records: Financial recording is done for the maintenance of a systematic record of all financial transactions in the books of accounts. It acts as an evidence and avoids the possibility of omission and fraud.
2. To calculate the profit or loss: The main aim of any business activity is to earn profit. Financial recording helps to ascertain the profit earned or loss incurred during a particular period of time. For this purpose, trading account and profit and loss account are prepared at the end of the period. They are a summary of incomes and expenses.
3. To ascertain financial position: Financial position means the values of assets, liabilities and capital as on a particular date. A businessman is not only interested in knowing the profit or loss but also wants to know what the business owes to others and what it owns and what is the position of capital - whether it has increased or decreased.
4. To provide information to users: There are two main user groups, viz. internal users, mainly management who needs timely information on cost, profits, etc., and external users like creditors, banks, government authorities etc. The information helps them in taking sound decisions about a business firm.