What Are Objective of Financial Accounting?
What Are Objective of Financial Accounting?
Financial accounting is a specified branch of accounting that involves recording, processing, summarizing, and reporting transactions business operations over a period. Financial accounting includes showing accurate business activities, ensuring compliance, fiscal and statutory requirements, and avail successful distribution of resources. The three vital financial statements are the income statement, balance sheet, and statement of cash flow.
Financial accounting applies defined accounting principles. The accounting principles for financial accounting depend on the regulatory and reporting requirements of the business. The accounting principles get defined so that investors, creditors, regulators, and tax authorities will have the rational information.
Financial accounting comprises financial statements based on data revenues, expenses, assets, liabilities, and equity.
Objectives of Financial Accounting
Financial accounting shows the transparency of profit and loss in the business for the stake of multiple investors of the company. The vital objectives of financial accounting are:
1 Legal compliance -
Financial accounting ensures legal compliance as per the legal regulations to taxation, companies Act and other legal requirements as per the country legalities. It assures that the business process sticks to the laws defined by the legal authorities of the country.
2 Preserves stake of various investors -
Financial accounting gives appropriate and relevant information on the business operations to multiple stakeholders like shareholders, prospective investors, sponsors, customers, creditors. The information about business stakes and investments is beneficial for the existing stakeholders and future investors.
3 Measures profit and loss -
It helps to calculate the business profitability at a particular time and reveals the gross profit or loss for the entire business. It also shows the assets and liabilities of the firm.
4 Representation of historical records -
It represents the historical data of the business rather than forecasting future data other than accounting practices. The primary motive of financial accounting is to prepare financial statements to show the profit or loss of the business.
5 External transactions of the business -
It holds account of the external business transactions that incorporate deals with the customers, suppliers, etc. Depending on those transactions, financial statements of the business get processed to estimate the expense involved and profit gained by the firm.
6 Timely reporting -
Financial accounting takes place at a particular time, which is generally quarterly, half-yearly, and annually. It helps quick and easy comparison of the business progress and gives accurate and relevant information to the multiple stakeholders. Financial statements of the firm are available and accessible for all who want to check the performance of the business.
7 The base for other accounting methods -
Financial accounting is the base for all the other accounting processes like cost accounting or management accounting. Financial accounting mainly involves business transactions that become a source for cost accounting for identifying the value of products and services.
8 Financial transactions -
Financial accounting tracks only monetary transactions or those transactions that involve economic factors. Non-financial transactions are out of scope for financial accounting.
9 Reliable and relevant -
It is essential to prepare financial accounts with reliability to make critical decisions based on the same. The accounting of the company should reflect legitimate transactions and functions in the business. Businesses exhibit real-time data and knowledge about the economic status of the company.
10 Understandable -
It is necessary to prepare financial accounts understandably so that any user or customer can understand. It is vital that in the preparation of financial accounting, no meaningful information or data is absent. It will turn complicated and bulky to know.
11 Managing Liquidity -
Carelessness towards the financial management in the business leads to its failure. Accounting assists firms in assessing how much cash or liquidity is necessary to pay their financial commitments. It helps the companies to manage their working capital and minimizes the risk of bankruptcy via knowing any loophole in the finances.
Financial accounting delivers various objectives that involve tracking, the appropriate classification, and summarising the financial transactions and functionalities via that business will provide related and essential insights to multiple customers.
About the author
Rupinder Kaur works as Senior SEO Associate with Sagenext and passionate writer. She is currently all in works writing about Quickbooks hosting, Technology and trends in accounting and tax.