What is Financial Accounting?
Financial accounting is a particular type of accounting that includes a method of documenting, summarising, and reporting the transactions arising from business operations for a period of time. Such transactions are outlined in the preparation of accounts, including the balance sheet, income statement, and cash flow statement, which document the financial results of the company over a particular period of time.
In India, companies must report the transactions that occur during the fiscal period or a financial year between 1 April to 31 March.
Financial accounting reflects the accounting on "accrual basis" over the accounting on "cash basis". Non-profit firms, companies, and small businesses use accountants in financial matters.
How Financial Accounting Works
Financial accounting follows the rules and principles to record, classify, and report financial transactions.
Financial accounting provides relevant and reliable financial information to external stakeholders, such as creditors and regulators, to make informed decisions. It helps stakeholders understand the company's financial position, performance, and cash flows and make investment, credit, and regulatory decisions based on that information.
Financial Accountant's Role
A financial accountant may have job opportunities in both the public and private sectors. The financial accountant's duties vary from those of a general accountant, who works for himself or herself rather than for a firm or organisation directly.
Financial accounting uses a set of accounting standards which are developed. The selection of accounting standards to be used by a financial accountant depends upon the regulatory and reporting requirements facing the company.
In India, the accounting standards issued by the Indian Institute of Chartered Accountants (ICAI) are applied. These are significantly based on and consistent with IFRS standards. However, there are some variations between certain principles of accounting and IFRS.
India's accounting principles have recently converged with IFRS (subject to a few carve-outs). These principles are called the Indian Accounting Principles or the Ind AS. These requirements are compulsory for listed and unlisted firms meeting certain net worth thresholds for accounting periods from 1 April 2016.
In compliance with the accounting principles established by the Companies Act, the financial statements must be published quarterly by companies listed on the recognised stock exchange.
Essential Aspects of Financial Accounting
The financial statements used in financial reports describe the five major financial data classifications: income, expenditures, assets, liabilities, and equity. Revenues and expenses are listed on the income statement. They will involve anything from research and development to the payroll.
Financial accounting results in net profit being calculated at the bottom of the income statement. The balance sheet reports on the assets, liabilities, and equity accounts. The balance sheet uses financial statements to disclose control of the potential economic benefits of the company.
The main distinction between financial and managerial accounting is that financial accounting is intended to provide information to parties outside the organisation. In contrast, managerial accounting information is designed to help managers make decisions within the organisation.
For governmental bodies and financial institutions, preparation of financial statements using accounting standards is of the highest importance. Various accounting standards do not translate well into the management of business activities. Therefore, internal management makes use of specific accounting rules and procedures for internal business review.
Importance of Financial Accounting
Financial accounting is crucial for businesses because it provides accurate, reliable, and timely information to internal and external stakeholders, enabling them to make informed decisions about the organization's financial position and performance. It helps businesses to comply with legal and regulatory requirements, manage financial risks, and improve their overall financial health and stability.
The primary objective of financial accounting is to record, summarize and present financial transactions in a structured and meaningful way, thereby providing users of financial statements with relevant and reliable information to make informed decisions.
One of the key benefits of financial accounting is that it enables businesses to keep track of their financial performance over time. By recording all financial transactions, businesses can determine their revenue, expenses, assets, liabilities, and equity at any given point in time, which can help them identify trends, areas of improvement, and potential financial risks.
Financial Accounting Advantages
Financial accounting provides a systematic and organized approach to recording, classifying, and summarizing financial transactions, which helps to ensure accuracy and consistency in financial reporting.
Financial accounting helps companies to comply with regulatory requirements and accounting standards, which helps to maintain transparency and accountability in financial reporting.
Financial accounting enables companies to make strategic decisions about investments, pricing, and cost management based on financial data and analysis.
Financial accounting can also provide insights into the financial health and performance of an industry or sector, which can be useful for policymakers, regulators, and researchers.