i need answer this qustion carefully this is my qustion in fainal exam please Qu

Question

i need answer this qustion carefully this is my qustion in fainal exam please

Question 1:

Discuss accounting as the language of business and the role of accounting information in making economic decisions

Explain the important of financial accounting information for external parties – primarily investors and creditors – in terms of the objectives and the characteristics of that information.

Explain how interim financial statements are prepared in a business that closes its accounts only at year end

Explanation / Answer

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Accounting as a Language of Business

Accounting is often called “the language of business. It communicates information to the owners, managers, and investors who need to evaluate a company's financial performance.

Accounting as means of communication :- Accounting allows various departments within an organization to effectively communicate among each other, as well as with external parties. By transforming raw financial data into a format that indicates an organization's financial performance in a number of areas, managers are able to determine whether the business is operating properly and develop plans of action if the business is not meeting company goals.

Standarization:- Accounting standardizes the means of communication among both internal and external parties within the business world. As all businesses confirm to standardized accounting practices, investors, shareholders and other external parties are able to easily evaluate business activities without specialized knowledge of a firm's accounting practices

Role of Accounting information in making economic decision

The purpose of accounting is to provide the information that is needed for sound economic decision making. The main purpose of financial accounting is to prepare financial reports that provide information about a firm's performance to external parties such as investors, creditors, and tax authorities.Accounting helps internal stakeholders in taking key decisions which helps them in streamlining business processes and also helps in fuelling the growth of the organisation.

Importance of Financial accounting information for external parties:-

Standardized accouting helps external parties like creditors and investors in making decision about the health of the organization. Creditors extending credit to organization can understand the ability olf the company of paying its dues on time. Similarly an investor investing in the organization can understand the health of the organization by looking into financial accouting information of the company such as the profitability etc. it will help investor detrmine his return on invetsment if he invests in the organization.

Interim Financial Statements Preparation

Generally a business closes its accounts only at year-end. The revenue, expense, and owner's drawing accounts have balances representing the activities of the year to date.If it need to prepare an income statement for any period shorter than the year-to-date, then we subtract from the current balance in the revenue or expense account the balance in the account as of the beginning of the desired period. This process of subtracting prior balances from the current balance is repeated for each revenue and expense account and for the owner's drawing account. No computations of this type are required for the balance sheet accounts, as a balance sheet is based on the account balances at the balance sheet date.

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