Financial accounting is a branch of accounting that deals with the summary, analysis, and reporting of financial transactions related to a business. It involves the preparation of financial statements that can be consumed by the public and relevant stakeholders. Financial accounting is intended to provide financial information on a companys operating performance. The process of financial accounting includes recording, summarizing, and reporting a companys business transactions through financial statements. Financial accounting is important for businesses because it helps them keep track of their financial transactions and make sound decisions on how to allocate their resources. Financial accounting is also critical in keeping companies responsible for their financial performance and position. Financial accounting standards dictate how financial statements are prepared and must conform to accounting standards and legal requirements. The following are some key principles and characteristics of financial accounting:
- Fundamental Qualitative Characteristics: Financial information would be useful to users if such qualitative characteristics are present.
- Profit and Loss Account and Balance Sheet: Financial accounting aims at finding out results of the accounting year in the form of Profit and Loss Account and Balance Sheet.
- External Reporting: Financial accounting reports the results and position of the business to government, creditors, investors, and external parties.
- Accrual Based Accounting: When transactions are recorded in the books of accounts as they occur even if the payment for that particular product or service has not been received or made, it is known as accrual-based accounting.
Overall, financial accounting is a crucial aspect of a businesss operations, providing valuable information to external parties and helping companies make informed decisions about their financial resources.
