Accounting has evolved and emerged in response to the social and economic needs of the society. The process of book keeping (maintenance of record of economic activities) developed as a direct result of the partnership on a large scale. In early times the accounting was merely concerned with ascertainment of results of business and there was no difference between ownership and management of business. The profit calculation was a simple comparison of the financial values at the beginning and end of the transactions or series of transactions.

The accounting processes have new orientation these day and the evolutionary reasons for the same are the divorce of the ownership and management and the emergence of professional management over a period of time.

The American Institute of Certified Public Accountant (AICPA) discussed financial accounting theory and generally accepted accounting principles as follows:

Financial statements are the products of process in which a large volume of data about aspects of the economic activities of an enterprise are accumulated, analysed and reported. The process should be carried out in accordance with generally accepted accounting principles. Generally accepted principles incorporate the consensus at a particular time as to which economic resources and obligations should be recorded as assets and liabilities by financial accounting, which change in assets and liabilities should be recorded, when these changes should be recorded and how the changes in assets and liabilities should be measured. GAAP also lays emphasis on what information should be disclosed and how it should be disclosed and which financial statements should be prepared.

The business organisations have grown in size particularly the publicly held corporations thereby affecting the public at large (whether or not they are shareholders). As a result of these changes the quality and quantity of information needs by various stakeholders viz. hareholders, creditors, potential investors, customers, employees government departments and agencies has increased many folds. The fact is that a wide variety of groups of people wholly divorced from the management of the enterprise are interested in the financial statement which are supposed to provide a true and fair picture of the position and progress of the enterprise. These groups rely on financial statement to make informed decisions. The two most important financial statements are Profit and Loss Account and the Balance Sheet.

The function of financial statements has evolved over a period of time and are as follows :

• Financial statements provide the relevant information to varied groups to make informed decisions;

• Financial statements depict business’s financial progress and position;

• Financial statements help settle the claims for/against the business entity;

• Financial statements help in formulation of policies for efficient conduct of business.

The basic framework under which the financial statement are prepared is the accounting or the accounting process. Thus the accounting may be defined as “the process of identifying, measuring and communicating economic information to permit informed judgments and decision by users of the information”. (American Accounting Association 1966). More recently the American Institute of Certified Public Accountants (AICPA) has defined accounting as “Accounting is a service activity. Its function is to provide quantitative information primarily financial in nature about economic activities that is intended to be useful in making economic decisions”. (AICPA, 1970).