Financial Accounting Theory
Now that we’ve covered some general book keeping and accounting conventions, let’s take a closer look at financial accounting, its importance, and specifically assets, liabilities, and equity accounts. Financial accounting principle focuses on the of the accounting – the cause why account are reported in few ways. The many of background accounting courses, cover the what and how of method of accounting. These include looking at hundreds of journal entries, gaining familiarity with all the common accounts that companies use, and learning how financial statements are put together and how to calculate the proper debit and credit amounts
Uncertainty and information asymmetry
One key factor in accounting involves the transmission of financial information to anyone who may need the information. These users then use this accounting information to make business and investment decisions or may choose to make no decision at all. However, in order to make proper decisions, the information being provided needs to be reliable and relevant. In economic reporting, we generally encounter a event called news asymmetry. This is a situation in which one party has more or less information than another party.
Supply and demand of accounting information
The presence of communication asymmetry makes a supply and request for financial reporting. Financial reporting is the disposition of tidings about the reporting existence and the transfer of that acquaintance from those which have it (goods) to them who must it (request). Suppliers of accounting information refer to accountants and the body that produces the financial statements. Those who request the knowledge send to internal/external users who demand that knowhow to make input conclusion.
The Purpose of Financial Reporting
As if the distinct purpose and aim of financial reporting may be Clear cut for different accounting part, the general topic is highly identical. According to IFRS, the purpose of financial reporting is to supply financial notice about the reporting being that is helpful to existing and probable investors, creditor and other creditors in making ruling about providing support to the existence. Those conclusion involve purchase, sales, or tenure fairness and debt apparatus, and legislation or Fay loans and other forms of credit.” IFRS also states that these decisions depend on the user’s expectations on the risk, amount, and timing of future net cash inflows of the reporting entity.
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