What is financial accounting?
Financial accounting is the process of identifying, measuring, and communicating economic information to the users of such information. It is concerned with recording business transactions and is directed towards ascertaining the operating result and financial condition. It is a branch of accounting primarily related to recording, classifying, summarizing, and presenting day-to-day transactions. It aims to ascertain profit and loss incurred during a particular time through a profit and loss account. Similarly, it shows the financial position on a given date through a balance sheet.
Financial accounting is historical since it records past transactions. It is the oldest branch of accounting which is equally applicable to all types of organizations. The other branches of accounting have their roots in it. It is based on the money measurement concept since it records the transactions that can be measured in monetary terms only. The accounting principles and standards under financial accounting are generally accepted and universally practiced. It aims to provide information about the results of the business operations and financial position to the internal and external parties.
Features of financial accounting
Here are some of the characteristic features:
Monetary recordkeeping
Financial accounts don’t record non-monetary transactions, regardless of their importance from a business point of view.
Historical transaction recording
Financial accountants only track transactions that have already taken place in the past.
Legal Requirements
As law mandates, organizations must keep their financial accounts up-to-date. They should also get financial statements audited to ensure accuracy.
Made for external use
Financial accounting reports inform customers, investors, suppliers, and financial institutions about the financial performance of an organization.
Interim reports
Organizations treat financial account statements covering less than a year as interim reports. These reports are useful for conveying the financial performance before a full-year reporting cycle ends.
Forms the basis of other accounting branches
It deals with raw data from journals and ledgers. Therefore, it is the foundation for other accounting branches, such as management accounting, cost accounting, and other advanced accounting methods.
Objectives of Financial Accounting
To record financial traction
The main objective of financial accounting is to record the financial transactions of a business systematically and scientifically. The need to record the transactions arises due to the limitation of memory power of human beings. Under financial accounting, the transactions are recorded in different books of accounts.
To disclose the result of the operation
Another important objective of financial accounting is to disclose the result of the operation i.e. profit earned or loss suffered during a particular period. This is achieved by preparing an income statement.
To reveal the financial status
It also aims to reveal the financial condition of a firm on a given date. For this, a statement of assets and liabilities called a balance sheet is prepared.
To supply necessary financial information
It aims to provide information to various parties like the government, investors, creditors, owners, etc. Usually, the information is supplied at the end of the accounting period through various financial statements.
Limitations of Financial Accounting:
Discloses the overall result only
Financial accounting discloses the overall result of a business. It fails to reveal the results of each department, process, product, job, etc.
Not helpful in price fixation:
Financial accounting does not provide adequate information for the fixation of selling prices of the product produced or services rendered by the business. So, it is not able to prepare tenders or quotations.
No control over cost
It does not provide a proper system of controlling various elements of cost like material, labor, and other expenses. Cost control procedures can be adopted by setting standards, but they lack financial accounting.
No classification of cost
Financial accounting does not classify costs into different categories such as direct and indirect, fixed and variable, controllable and uncontrollable, normal and abnormal, etc. It only divides expenditures into two categories capital and revenue.
Fails to offer a system of standards
Financial accounting fails to measure the efficiency of material, labor, and other resources as it does not offer any system of standards.
Fails to offer cost information
Financial accounting does not provide cost information to the management to make plans and decisions as well as control the operations.