Financial accounting is the field of accountancy concerned
with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, employees, government agencies, owners and other stakeholders. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.
The central need for financial accounting is to reduce the various principal-agent problems, by measuring and monitoring the agents' performance and thereafter reporting the results to interested users.
Financial accountancy is used to prepare accountancy data for people outside the organisation or for those, who are not involved in the mundane administration of the company. Management accounting, provides accounting information to help managers make decisions to manage and enhance the business.
In short, financial accounting is the process of summarising financial data, which is taken from an organisation's accounting records and publishing it in the form of annual or quarterly reports, for the benefit of people outside the organisation.
Financial accountancy is governed not only by local standards but also by international accounting standard.
ROLE OF FINANCIAL ACCOUNTING
1. Financial accounting generates some key documents, which includes profit and loss account, patterning the method of business traded for a specific period and the balance sheet that provides a statement, showing mode of trade in business for a specific period.
2. It records financial transactions showing both the inflows and outflows of money from sales, wages etc.
3. Financial accounting empowers the managers and aids them in managing more efficiently by preparing standard financial information, which includes monthly management report tracing the costs and profits against budgets, sales and investigations of the cost.
IMPORTANCE OF FINANCIAL ACCOUNTING
• It provides legal information to stakeholders such as financial accounts in the form of trading, profit and loss account and balance sheet.
• It shows the mode of investment for shareholders.
• It provides business trade credit for suppliers.
• It notifies the risks of loan in business for banks and lenders.
BENEFITS OF ACCOUNTING
- Maintaining systematic records:
It is a primary function of accounting to keep a proper and chronological record of transactions and events, which provides a base for further processing and proof for checking and verification purposes. It embraces writing in the original/subsidiary books of entry, posting to ledger, preparation of trial balance and final accounts.
- Meeting legal requirements:
Accounting helps to comply with the various legal requirements. It is mandatory for joint stock companies to prepare and present their accounts in a prescribed form. Various returns such as income tax, sales tax are prepared with the help of the financial accounts.
- Protecting and safeguarding business assets:
Records serve a dual purpose as evidence in the event of any dispute regarding ownership title of any property or assets of the
business. It also helps prevent unwarranted and unjustified use. This function is of paramount importance, for it makes the best use of available resources.
- Facilitates rational decision-making:
Accounting is the key to success for any decisionmaking process. Managerial decisions based on facts and figures take the organisation to heights of success. An effective price policy, satisfied wage structure, collective bargaining decisions, competing with rivals, advertisement and sales promotion policy etc all owe it to well set accounting structure. Accounting provides the necessary
database on which a range of alternatives can be considered to make managerial decision-making process a rational one.
- Communicating and reporting:
The individual events and transactions recorded and
processed are given a concrete form to convey information to others. This economic information derived from financial statements and various reports is intended to be used by different groups who are directly or indirectly involved or associated with the business enterprise.
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