Financial accounting is understood as a business language. It is essentially used to communicate financial information with stakeholders. Business transaction data is a significant way of communicating an organisation’s financial performance. Businesses get loans to fulfil their fund requirements.
Financial accounting is used for efficient problem-solving. A well-structured process is critical in recording financial transactions. According to the reports of Ace cloud hosting, the global market value for accounting services reached an impressive $544.06 billion, as reported by research markets. This shows the significance of financial accounting applications worldwide.
For example, Ana is the owner of a retail business. She tracks records of sales, expenses, & profits. She assesses her business’s financial health periodically. It is done by preparing balance sheets such as income statements, etc.
This data helps her manage and make informed decisions. Such decisions include budgeting, control over capital flow, and investments. In addition, investors and lenders rely on such reports to evaluate a company’s profitability. These reports ensure safety and transparency in the business.
Understanding financial accounting
Financial accounting is a tedious process. It generally includes recording, summarising, and reporting any business transactions. Financial accounting takes care of everyday operations in the business.
The Indian Accounting Standard (Ind AS) maintains accuracy and uniformity throughout the process. The guidelines laid here are at par with the International Financial Reporting Standards (IFRS).
An accounting team ensures efficiency in recording financial statements, such as cash flow statements. They ensure accuracy in maintaining income statements and shareholder’s equity statements. The main goal of a finance accountant is to give a detailed picture of profits and losses.
Application of financial accounting
| Regulating the requirements | Organisations ensure compliance with tax regulations and the Companies Act. |
| Financial recordkeeping | A well-strategised process for recording financial transactions in accounting books. It is done to maximise financial performance. |
| Determination of profitability | Financial accounting ensures the optimisation of profits. It also calculates interest, taxes, purchases, rent salary, etc. |
Different kinds of financial statements
There are various kinds of financial statements recorded in a business. Some of them are enlisted as:
- Balance sheet
- Income statement
- The flow of capital statement
- Statement of retained earnings or statement of owner’s equity
Functions of financial accounting
Financial accounting has proven to be advantageous for your business. It essentially helps investors, lenders, and tax authorities with the company’s financial health. Financial accounting tracks incoming and outgoing cash flow transactions.
Let us understand the vital functions of financial accounting.
- Maintenance of systematic records.
- Recording the financial transactions while meeting accounting standards & regulatory guidelines.
- Analysis and summarising of financial records.
- Accounting teams analyse and summarise transactions and then create final accounts. These final statements depict profits and losses happening in an organisation.
- Upkeep with legal requirements.
- Financial accounting makes sure the company meets the standards of legal obligations. These obligations include book auditing and tax liabilities.
- Finance accountants help the company to be transparent with their financial performance. These financial performances can be shared with investors, shareholders, etc. to show credence.
Features of finance accounting
Various characteristic features of finance accounting are enlisted as:
Monetary transaction: For financial accounting, only monetary transactions are considered significant. Transactions apart from monetary basis are not considered a place in financial accounting.
Historical nature: The transactions that have already taken place are considered in financial accounting. No futuristic transactions are considered under financial accounting. However vital they must be from a business point of view.
Legal requirements: it is critical to maintain the financial accounting and prepare financial statements therefrom. It is important to audit these financial statements.
External use: financial accounting is an important tool for investors, customers, suppliers, etc. These people are generally not part of the organisation. It is especially for the external use.
The conclusion
To conclude, financial accounting is a significant part of a business venture. It helps in maintaining records and keeping up with what is happening in the business. Financial accountants find various roles in an organisation.
Most importantly, they decide on the budget of the organisation. Financial accounting ensures safety and transparency for investors. Therefore, a successful business must ensure financial accounting.