Meaning of Financial Accounting
Financial accounting is a branch of accounting which records each financial information and analyse it to determine the financial position of a business. It is a process of recording, summarising, analysing and presentation of all financial transactions of a business in the form of financial statements. Financial accounting involves the preparation of various financial statements like income statement, cash flow statement, balance sheet etc. using accounting principles.
These financial statements are prepared on a routine basis by companies and presented to all its stakeholders. Financial accounting aims at delivering the fair and accurate image of financial affairs of business to all its stakeholders. It is done in accordance with rules provided by GAAP or IFRS. It is an important tool for management in their decision making as they depend on financial reports for decision making and forecasting purposes.
Financial statements prepared by financial accounting takes into account the following aspects of business viz. Expenses, Revenue, Asset, Equity and Liability. Financial accounting has an important role in increasing profitability and efficiency as it helps in managing all financial resources of the business. It is statutory required to practice financial accounting in their operations by every business organisation. Scope of Financial Accounting is described as given below:
Scope of Financial Accounting
Records Financial Transactions
Financial accounting record each and every financial transaction taking place in the business organisation. It maintains a clear and systematic record of all information in the form of journals and various subsidiary books. It avoids any confusion or loss because if any problem arises these records can be easily checked. All transaction cannot be just memorized by humans without recording them and that makes the financial accounting important part of every business.
Classify and Summarize Information
Information collected and recorded by financial accounting is properly categorized according to their nature. Financial accounting involves classifying and summarizing all financial information recorded at the initial step. All transactions of similar nature are grouped together under one head by making accounts like Sales, Purchase, Rent, Salaries, Interest etc. Grouping of same nature transactions together adds convenience in understanding of information collected.
Prepares Financial Statements
Financial accounting prepares financial statements like cash flow statement, income statement, balance sheet etc. These financial statements depict the true financial position of business. Financial statements are the result of various information collected and analysed in overall process of financial accounting. All financial strength and weakness of business are determined by preparation of financial statements.
Interprets Financial Information
Financial accounting interprets information from several analysis conducted and financial statements prepared. It understands and explains the results of several relationships establishes by analysis to different users for easy understanding and decision making. It simplifies the accounting information so that it is well understood by persons having limited or no knowledge of accounting subject.
Communicates All Outcomes
Financial accounting serves the needs of all external stakeholders by delivering them true and accurate picture of the company’s financial affairs. It communicates them all financial information by providing them with financial reports routinely. All interested parties to business are fully aware of all business financial matters and this helps them in making conclusions. It helps them in knowing profitability and future growth aspects through these reports.
Determines and Maintains Financial Position
Financial accounting determines fair and actual image of financial position of business. Finance is termed as lifeline of business activities and its management is quite important for every organisation. Mismanagement of financial resources may have adverse effects on the company’s performance. Financial accounting records and analyse each financial aspect of business.
It delivers all information to internal management team from time to time for their decision making. Management are able to take all necessary steps whenever required related to financial resources which will improve the overall productivity. This all helps in maintaining a proper financial position for every business.