What is Financial Accounting?

What is Financial Accounting?

Learning financial accounting will help you better understand the primary function of accounting, which are the recording, summarizing and reporting of business transactions to stakeholders.

In this article, you will get to know what financial accounting is, why is it important to business organizations, who govern the rules and standards of financial reporting, and how it differs from the other areas of accounting.

What is Financial Accounting?

Financial accounting is one of the areas of accounting which is primarily concerned on the recording, summarizing and communicating business transactions to external and internal stakeholders in the form of financial statements. These financial statements are intended to be used to form sound judgment regarding the financial condition and performance of a business, and other relevant decision making.

Role of Financial Accounting in Business

Every business is required by law, in which the business is registered and operated, to maintain a record of its business transaction and communicate those in the form of financial reports. These reports are commonly referred to as financial statements.

The users of these financial statements are what we call stakeholders. These are individual, group of individuals or organization which are directly and indirectly interested in the course of a business which includes the owner, managers, employees, creditors, the government or general public.

Financial accounting is the accounting process that culminates in the preparation of financial reports of a business which is used by stakeholders in forming their economic decisions.

The main objective of financial accounting is to provide information regarding the financial condition and performance of a business entity. This information are reported and communicated in the form of financial statements.

Additionally, financial accounting shows the results of stewardship of a business management. By looking at the financial reports, users can interpret how well or bad the business management has operated and used its resources.

Who Governs the Financial Reporting Standard?

Since financial accounting is the process that provides financial reports to the general public, professionals in the accounting, trade and commerce, have developed and formed an accounting standard which will serve as the foundation of all accounting process and procedures performed. Such accounting standard is referred to as the Generally Accepted Accounting Principles (GAAP).

GAAP represents the rules, procedures, practice and standards followed in the preparation and presentation of the financial statements. Its purpose is to ensure consistency and comparability of reported financial information of business entities, in order to protect the users or general public, since they use financial reports in their economic decisions.

Difference between Financial Accounting and Bookkeeping

Financial accounting is different from bookkeeping. Bookkeeping is a branch of financial accounting which pertains to the procedural process of recording and maintaining the business transactions. The only function of bookkeeping is to keep the financial record of the business accurate and complete.

On the other hand, financial accounting includes a broader role compared to bookkeeping. It is not merely procedural in nature but also conceptual. Financial accounting is also concern with the why, reason or justification of any action adopted. It is responsible not only in the complete and accurate recording of business transactions but also it ensures that the reported financial statement abides by the accounting standards, and all other reporting standards, such as the government.

I hope this article has been helpful for you to learn and understand financial accounting. Your comments and feedbacks will be appreciated.

Recommended Reading

This book will help you understand what accounting is all about and its evolving role in business.  It is considered as the most successful higher education accounting text of all time.  With this book, you will learn the framework in understanding the accounting concepts and principles, as well as in preparing financial statements. Read more here.

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