Meaning of Financial Accounting
Financial Accounting is a branch of accounting that deals with the recording, summarising, analysing, and reporting of financial transactions related to a business. The main purpose of financial accounting is to prepare financial statements that provide information about the financial position and performance of an organization.
These financial statements are mainly prepared for external users who are not involved in the day-to-day management of the business.
Users of Financial Accounting Information
Financial statements prepared through financial accounting are useful for various stakeholders who use them for decision-making. These users include:
- Shareholders (Stockholders)
- Suppliers
- Banks and Financial Institutions
- Employees
- Government Agencies
- Business Owners
- Other Stakeholders
These users analyse the financial information to make decisions regarding investment, lending, business relationships, taxation, and other financial matters.
International Financial Reporting Standards (IFRS)
The International Financial Reporting Standards (IFRS) are a set of accounting standards that prescribe how different types of financial transactions and events should be reported in financial statements.
The International Accounting Standards Board (IASB) is responsible for issuing IFRS. These standards promote uniformity, consistency, transparency, and comparability in financial reporting across organizations.
Exam Point
- IFRS = International Financial Reporting Standards
- IASB = International Accounting Standards Board (Issuer of IFRS)
Financial Accounting vs Managerial Accounting vs Cost Accounting
Although all three branches deal with accounting information, their purposes are different.
| Basis | Financial Accounting | Managerial Accounting | Cost Accounting |
|---|---|---|---|
| Main Purpose | Preparation of financial statements | Assisting managers in decision-making | Determining the cost of production or services |
| Users | External users | Internal management | Management |
| Objective | Financial reporting | Business management and planning | Cost control and cost reduction |
Financial Accounting
Financial accounting prepares accounting information for external users, such as investors, banks, suppliers, government authorities, and other stakeholders. It focuses on preparing financial statements that present the overall financial performance of the business.
Managerial Accounting
Managerial accounting provides accounting information to managers for planning, controlling, and making business decisions. It supports the internal management of the organization.
Cost Accounting
Cost accounting focuses on computing the cost of production or services. It helps management in cost control and cost reduction, thereby improving operational efficiency.
Objectives of Financial Accounting
Financial accounting and financial reporting are often used as synonymous terms because both focus on providing financial information through financial statements.
According to the International Financial Reporting Standards (IFRS), the primary objective of financial reporting is to provide financial information that is useful to existing and potential investors, lenders, and other creditors in making decisions regarding the provision of resources to the reporting entity.
In simple terms, the objective of financial accounting is to provide reliable, relevant, and useful financial information that assists stakeholders in making informed economic decisions.
The European Accounting Association (EAA) also recognizes capital maintenance as an important objective of financial accounting. Capital maintenance focuses on preserving the financial capital of the business while reporting its financial performance.
Key Points
- Financial Accounting is concerned with recording, summarising, analysing, and reporting financial transactions.
- The primary output of financial accounting is financial statements.
- Financial accounting mainly serves external users.
- Users include shareholders, suppliers, banks, employees, government agencies, business owners, and other stakeholders.
- IFRS stands for International Financial Reporting Standards.
- IASB (International Accounting Standards Board) issues IFRS.
- Financial accounting is different from managerial accounting and cost accounting.
- Managerial Accounting supports internal decision-making.
- Cost Accounting focuses on cost computation, cost control, and cost reduction.
- According to IFRS, the objective of financial reporting is to provide useful financial information to investors, lenders, and other creditors.
- Capital maintenance is also recognized as an objective of financial accounting by the European Accounting Association (EAA).
Quick Revision Summary
| Topic | Remember |
|---|---|
| Financial Accounting | Recording, summarising, analysing and reporting financial transactions |
| Main Output | Financial Statements |
| Main Users | External Stakeholders |
| IFRS | International Financial Reporting Standards |
| Issued By | International Accounting Standards Board (IASB) |
| Managerial Accounting | Internal decision-making |
| Cost Accounting | Cost computation, cost control and cost reduction |
| Objective | Provide useful financial information for economic decisions |
| Additional Objective | Capital Maintenance |