What is ‘Financial Accounting’?
The aim of any business is to earn profit and remain solvent. In a nutshell, accounting helps the company to keep track of its profits or losses.
‘Financial Accounting’ is the cycle of recording, summarizing and reporting the myriad transactions from a business, so as to provide an accurate picture of its financial position and performance. The primary objective of financial accounting is the preparation of financial statements – including the balance sheet, income statement and cash flow statement – that encapsulate the company’s operating performance over a particular period and financial position at a specific point in time.
These statements which are generally prepared quarterly and annually, and in accordance with Generally Accepted Accounting Principles (GAAP) – are aimed at external parties including investors, creditors, regulators and tax authorities.
What is an Accounting cycle?
Once a business transaction occurs, a sequence of activities identify and analyze the transaction and make journal entries etc. Because this process repeats over transactions and accounting periods it is referred to as the Accounting cycle.
Objectives of Financial Accounting
- Systematic recording of transactions:To systematically record the financial aspects of business transactions (i.e. book-keeping).
- Ascertaining result of recorded transactions: To prepare a profit and loss statement to know the result of business operations for a particular period of time. This helps the management and stakeholders to take rational decisions.
- Ascertaining financial position of business: To prepare a financial position statement of assets and liabilities of the business at a particular point of time in order to ascertain the financial health of the business.
- Providing information to the users for rational decision-making: As a ‘language of business’, Accountancy communicates the financial result of an enterprise to various stakeholders by means of financial statements.
- To know the solvency position: It conveys a clear picture of the company’s ability to meet its liabilities in the short run (liquidity position) and also in the long-run (solvency position) as and when due.
What is the difference between financial and managerial accounting?
Financial accounting is aimed at providing information to parties outside the organization, whereas Managerial accounting information is aimed at helping managers within the organization make decisions.