What is Financial Accounting? — Accounting Doctor

Accounting is the parent function of recording and reporting business transactions in a systematic manner. With the evolution of business, different stakeholders who are either directly or indirectly connected to a business require a special sort of accounting information for deciding. As a result, the parent function of accounting required separate branches to fulfill this need, and financial accounting is one of the several branches of accounting.

Financial accounting refers to a process of recording, summarizing, analysis, and reporting of all the financial transactions of the business for a given period. As a main branch of accounting, financial accounting is responsible for tracking and reporting financial transactions of the corporate. Financial accounting follows the rules which are set by both local and international standards. the knowledge from financial accounting is employed by both internal and external users for deciding.

Purposes of Financial Accounting

The main objective of monetary reporting is to supply financial information to different stakeholders like business owners, creditors, banks, investors, etc. we’ve listed a number of the key objectives of monetary accounting below:

• Recording of monetary transactions in a systematic manner such that it helps in financial reporting and analyzing.
• Preparing financial statements is governed by the accounting principles which are generally accepted and understood.
• Determining the performance of the business in terms of profit
• Ascertaining the financial health of the business
• To keep a tab on the financial liquidity of the business.
• Provide all the required financial information to different stakeholders for making a decision.

Financial Accounting Principles

Financial accounting follows a group of common guidelines and rules which are governed both locally and international standards. The rules followed by financial accounting are commonly mentioned as financial accounting principles or ‘Generally Accepted Accounting Principles’ which is popularly known as ‘GAAP’. Accounting principles help to bridge the gap and aim to bring some level of uniformity in financial reporting such that the financial statements are often easily interpreted and understood.

Financial accounting principles consist of three Key sections that act as a foundation for financial accounting.

Components of Monetary Accounting

Financial accounting consists of three key components illustrated within the below image. Often these components of monetary accounting are referred to as the top 3 financial statements. The stakeholders use these statements to understand the financial position, profitability, and liquidity of the business.

Financial reporting refers to the method of communicating financial information to the stakeholders. Financial reporting is an activity of monetary accounting to organize financial statements. Financial reporting and financial accounting are used interchangeably as synonyms. Being a part of financial accounting, the target of monetary reporting isn’t different.

Financial reporting involves preparing financial statements to disclose financial information like assets, liabilities, owner’s liquidity, revenue, expenses, etc.

Originally published at http://accountingdoctor.in on October 10, 2020.