Fiscal accounting is a method of reporting the company's value. It also provides information on its budgetary health. The statement is a comprehensive assessment of four main verticals for the stakeholders. These are the institutes' expenses, revenue, profits and liabilities.
Investors and owners use financial statements to convey organisational performance. These statements are significant in helping firms raise capital. They also shed light on the organisation's industrial ranking. In this article, we will discuss the definition and purpose of financial accounting.
What is Financial Accounting
Financial accounting deals with keeping records and summaries of business transactions. These transactions from business operations get reported over a period. Financial statements comprise four essentials -
Cash flow statement,
Balance sheet and
statement of retained earnings.
These statements follow strict legal, fiscal, statutory and regulatory guidelines. The accurate statements allow stakeholders to understand companies' activities. Now, let us understand the purpose of financial accounting in detail.
Purpose of Financial Accounting
The most significant purpose of financial accounting is to report the firm's fiscal health. The regulatory statements shed light on the valuation of companies. This allows stakeholders to make informed choices about the company's future. Some other purposes of financial accounting are given below.
Financial accounting creates a standardised recording of business transactions. The systematic compilation method makes the collection and sorting of information easier. This information is further summarised and analysed. Standardised data then helps end user draw actionable insights.
It reflects the profitability of the company. The comparison of the profit and loss statements allows stakeholders to make decisions. It also helps management to make decisions - such as those helping to achieve positive results.
As the representative of financial health, financial accounting shows assets and liabilities. This can help shareholders analyse whether a company has more assets or liabilities.
The statements also show the solvency or liquidity state of the organisation. This helps stakeholders find out if the organisation is meeting its debt obligations.
The purpose of financial accounting is to help in decision-making. Based on the financial value and health, investors can make rational decisions. It also helps creditors assess the prospects of the company.
For the owner and management, it provides insight. Financial statements help consider investment decisions and strategic concepts. For example, the decision for expansion of products or market.
Financial accounting acts as a tool for promoting trust. The governing bodies that manage the rules for reporting are independent. Thus, the source of reported information should be accurate.
The statements also encourage organisations to maintain transparency. The rules of reporting force organisations to disclose important information. Such as how well is the company performing. This informs stakeholders of the risks faced by the company. It also discloses how poor or well is the company at present.
Users of Financial Accounting
Primary users of financial accounting are:
Financial accounting allows auditors to analyse statements of financial position. They ensure there are no misstatements under accounting guidance.
The financial report allows them to understand if the company is an attractive investment. It also helps in setting up an expectation for the future.
Agencies for regulations
It helps to govern bodies by keeping companies in legal reporting requirements. In case the firms do not comply, they face a heavy fine and the risk of delisting from the exchange.
Financial statements allow vendors to decide on their relationship with the firm. One of the basis is the credit history of the company.
In case the company needs to raise capital, financial statements are a must. It allows banks to understand the company’s repayment capabilities.
Financial accountings are imperative for any company. It dictates the framework governing the preparation of the four financial statements. It also helps in keeping the organisation's accounts. The guidelines oversee the information arising from business transactions. They ensure setting up in a widely accepted form. It further helps managers assure business transparency. Thus, those looking for a career in financial accounting must be well-versed in the concept.
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