Financial accounting

Financial accounting

Financial accounting (or monetary accountancy) is the field of accounting which involves the outline, analysis, and reporting of monetary transactions concerning a business. This involves the preparation of monetary statements offered for public consumption. Stockholders, suppliers, banks, employees, government agencies, business owners, and different stakeholders are samples of individuals fascinated by receiving such information, for decision-making functions.While financial accounting is employed to arrange accounting info for individuals outside the organization or not concerned within the daily running of the corporate, managerial accounting provides accounting info to assist managers in making decisions to handle the business.Financial accounting and monetary reporting are typically used as synonyms.

As per International Financial Reporting Standards, the target of Financial Reporting is:-

To provide monetary info concerning the reporting entity that’s helpful to existing and potential investors, lenders and different creditors in making decisions about providing resources to the entity.

As per the European Accounting Association:

Maintaining capital is the competitive objective of financial reporting.Financial accounting is the preparation of monetary statements which will be consumed by the general public and therefore the relevant stakeholders using either Historical Cost Accountancy (HCA) or Constant Purchasing Power Accounting (CPPA). While building the monetary statements, they need to go with the following:

• Relevance: Financial accounting is decision-specific. It should be potential for accounting info to influence selections. Unless this characteristic is present, there’s no purpose in cluttering statements.
• Materiality: Info is material if its omission or wrong statement may influence the economic selections of users taken on the basis of the financial statements.
• Reliability: Accounting should be free from important error or bias. It ought to be simply relied upon by managers. Typically info that’s extremely relevant isn’t very reliable and vice versa.
• Understandability: Accounting reports ought to be expressed as clearly as possible and may be understood by those to whom the data has relevancy.
• Comparability: Financial reports from totally different periods ought to be compared with associate each other so as to derive purposeful conclusions concerning the trends in an entity’s monetary performance and position over time. Comparability will be ensured by applying constant accounting policies over time.

Objectives of Financial Accounting:

• Systematic recording of transactions: The essential objective of accounting is to consistently record the monetary aspects of business transactions (i.e. book-keeping). These recorded transactions area unit anon classified and summarized logically for the preparation of monetary statements and for his or her analysis and interpretation.
• Ascertainment of the results of the recorded transactions: Trained accountant prepares profit and loss account to grasp the results of business operations for a specific amount of time. If expenses exceed revenue then it’s same that the business is running under loss. The profit and loss account helps the management and various stakeholders in taking rational selections. For instance, if the business isn’t proved to be remunerative or profitable, the explanation for such a state of affairs will be investigated by the management for taking remedial steps.
• Ascertainment of the financial position of business: The business professional isn’t solely fascinated by knowing the results of the business in terms of profits or loss for a specific amount however is additionally anxious to grasp that what he owes (liability) to the outsiders and what he owns (assets) on an explicit date. To grasp this, the accountant is trained to prepare a monetary position statement of assets and liabilities of the business at a specific purpose of your time and helps in ascertaining the monetary health of the business.
• Providing info to the users for rational decision-making: Accounting as a ‘language of business’ communicates the monetary results of associate enterprise to numerous stakeholders by suggests that of monetary statements. Accounting training aims to fulfill the monetary info needs of the decision-makers and helps them in rational decision-making.
• To grasp the economic condition position: By getting proper training one can prepare balance sheets. Management not solely reveals what’s owned and owed by the enterprise, however conjointly it offers the data relating to concern’s ability to fulfill its liabilities within the short run (liquidity position) and also within the long-term (solvency position) as and when they fall due.