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211 
QUESTION 
Forces
 
List the forces that have shaped financial accounting, stating the effect of each. 
ANSWER 
(a) 
Company law
requires companies to prepare accounts and regulates their form and content. 
(b) 
Accounting concepts
are applied by individuals using their 
subjective judgement
. 
(c) 
Accounting standards
help to eliminate subjectivity. 
(d) The 
European Union
issues directives on accounting matters which we must apply. 
(e) 
International Financial Reporting Standards
aim to harmonise accounting around the world. 
(f)
 GAAP
is a collection of rules from various sources, governing accounting. 
 
 
4
Internal and external financial information 
The two most important external financial statements are the statement of financial position and the 
profit or loss account. Reports produced for internal purposes include budgets and costing schedules.
4.1 External reports 
Businesses prepare financial statements for 
external stakeholders
, such as shareholders, banks, 
suppliers and the Government.
The main reports produced for external purposes are the financial statements, which give the historic 
position of the business. The main statements are as follows. 

The profit or loss account (also known as the income statement, or statement of profit or loss) 

The statement of financial position (also known as a balance sheet) 

The statement of cash flows 
4.2 The profit or loss account
The 
profit or loss account 
is a record of income generated and expenditure incurred over a given period.
The profit or loss account of a limited liability company will be made up for the period of a year, 
commencing from the date of the previous year's accounts. It shows whether the business has more 
income than expenditure (a profit) or vice versa (a loss) during a period. 
Management accountants might need quarterly or monthly income statements for internal purposes. 
Organisations which are not run for profit (charities etc) produce a similar statement called an