What is financial accounting? Introduction, Meaning and Definition
As mentioned earlier, financial accounting deals with the preparation of financial statements for the basic purpose of providing information to various interested groups like creditors, banks, shareholders, financial institutions, government, consumers, etc.
Financial accounting is the field of accounting concerned with the summary, analysis, and reporting of financial transactions related to business.
Financial statements, i.e. the income statement and the balance sheet indicate the way in which the activities of the business have been conducted during a given period of time.
Financial accounting is charged with the primary responsibility for external reporting. The users of the information generated by financial accounting, like bankers, financial institutions, regulatory authorities, government, investors, etc. want the accounting information to be consistent so as to facilitate comparison.
Therefore, financial accounting is based on certain concepts and conventions which include a separate business entity, going concern concept, money measurement concept, cost concept, dual aspect concept, accounting period concept, matching concept, realization concept and conventions of conservatism, disclosure, consistency, etc. All such concepts and conventions would be dealt with detail in subsequent lessons.
The significance of financial accounting lies in the fact that it aids the management in directing and controlling the activities of the firm and to frame relevant managerial policies related to areas like production, sales, financing, etc.
However, it suffers from certain drawbacks which are discussed in the following paragraphs.
The management of a company has to solve certain ticklish questions like the expansion of business, making or buying a component, adding or deleting a product line, deciding on alternative methods of production, etc. The financial accounting information is of little help in answering these questions.
The limitations of financial accounting, however, should not lead one to believe that it is of no use. It is the basic foundation on which other branches and tools of accounting analysis are based. It is the source of information, which can be further analyzed and interpreted according to the tailor-made requirements of decision-makers.
Meaning of financial accounting:
Financial accounting is the field of accounting concerned with the summary, analysis, and reporting of financial transactions related to business.
Financial statements, i.e. the income statement and the balance sheet indicate the way in which the activities of the business have been conducted during a given period of time.
Financial accounting is charged with the primary responsibility for external reporting. The users of the information generated by financial accounting, like bankers, financial institutions, regulatory authorities, government, investors, etc. want the accounting information to be consistent so as to facilitate comparison.
Therefore, financial accounting is based on certain concepts and conventions which include a separate business entity, going concern concept, money measurement concept, cost concept, dual aspect concept, accounting period concept, matching concept, realization concept and conventions of conservatism, disclosure, consistency, etc. All such concepts and conventions would be dealt with detail in subsequent lessons.
The significance of financial accounting lies in the fact that it aids the management in directing and controlling the activities of the firm and to frame relevant managerial policies related to areas like production, sales, financing, etc.
However, it suffers from certain drawbacks which are discussed in the following paragraphs.
- The information provided by financial accounting is consolidated in nature. It does not indicate a break-up for different departments, processes, products, and jobs. As such, it becomes difficult to evaluate the performance of different sub-units of the organization.
- Financial accounting does not help in knowing the cost behavior as it does not distinguish between fixed and variable costs.
- The information provided by financial accounting is historical in nature and as such the predictability of such information is limited.
The management of a company has to solve certain ticklish questions like the expansion of business, making or buying a component, adding or deleting a product line, deciding on alternative methods of production, etc. The financial accounting information is of little help in answering these questions.
The limitations of financial accounting, however, should not lead one to believe that it is of no use. It is the basic foundation on which other branches and tools of accounting analysis are based. It is the source of information, which can be further analyzed and interpreted according to the tailor-made requirements of decision-makers.
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