Ans :
Financial accounting dates from the development of large-scale business and the
advent of the Joint Stock Company. This form of business which enables the public to
participate in providing capital in return for shares in the assets and the profits of the
company. This form of business organisation permits a limit to the liability of their
members to the nominal values of their shares. This means that the liability of a
shareholder for the financial debts of the company is limited to the amount he had
agreed to pay on the shares he bought. He is not liable to make any further
contribution in the event of company’s failure or liquidation. As a matter of fact, the
law governing the operations (or functioning) of a company in any country (for
instance, the Companies Act in India) gives a legal form to the doctrine of stewardship
which requires that information be disclosed to the shareholders in the form of annual
income statement and balance sheet such statements are generally known as annual
financial statements.
Briefly speaking, the income statement is a statement of profit and loss made during
the year of the report; and the balance sheet indicates balances of the assets held by
the firm and the monetary claims against the firm as on a particular date. The general
unwillingness of the company directors to disclose more than the minimum
information required by the law, and the growing public awareness have forced the
governments in various countries of the world to extend the disclosure (of
information) requirements.
The importance attached to financial accounting statements can be traced to the need
of the society to mobilise savings, and channel them with profitable investments.
Investors, whether they are large or small, must be provided with reliable and
sufficient information in order to be able to make sound investment decisions. This is
the most significant social purpose of financial accounting.
