Introduction to financial accounting
Accounting is the parent function of recording and reporting business transactions in a systematic manner. With the evolution of business, different stakeholders who are either directly or indirectly connected to a business require a different type of accounting information for decision making. As a result, the parent function of accounting required separate branches to fulfil this need, and financial accounting is one among the several branches of the accounting.
What is financial accounting?
Financial accounting refers to a process of recording, summarizing, analysis and reporting of all the financial transactions of the business for a given period. As a main branch of accounting, financial accounting is responsible for tracking and reporting financial transactions of the company. Financial accounting follows the guidelines which are set by both local and international standards. The information from financial accounting is used by both internal and external users for decision making.
Objectives of financial accounting
The main objective of financial reporting is to provide financial information to different stakeholders like business owners, creditors, banks, investors, etc. We have listed some of the key objectives of financial accounting below:
- Recording of financial transactions in a systematic manner such that it helps in financial reporting and analyzing.
- Preparing financial statements as governed by the accounting principles which are generally accepted and understood.
- Determining the performance of the business in terms of profit
- Ascertain the financial health of the business
- Financial liquidity of the business.
- Provide all the necessary financial information to different stakeholders for decision making.
Financial accounting principles
Financial accounting follows a set of common guidelines and rules which are governed both locally and international standards. The guidelines followed by financial accounting are commonly referred to as financial accounting principles or 'Generally Accepted Accounting Principles' which is popularly knowns ‘GAAP’. Accounting principles helps to bridge the gap and aims to bring some level of uniformity in financial reporting such that the financial statements can be easily interpreted and understood.
Components of financial accounting
Financial accounting consists of 3 key components illustrated in the below image. Often these components of financial accounting are referred as top 3 financial statements. The stakeholders use these statements to know the financial position, profitability and liquidity of the business.
Financial reporting refers to the process of communicating financial information to the stakeholders. Financial reporting is an activity of financial accounting to prepare financial statements. Financial reporting and financial accounting are used interchangeably as synonyms. Being part of financial accounting, the objective of financial reporting is not different.
Financial reporting involves preparing financial statements to disclose financial information such as assets, liabilities, owner’s liquidity, revenue, expenses etc.
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