Financial accounting is the process of accounting regarding the financial transactions of business organizations. It involves analyzing, recording, summarizing, and reporting of every transaction made from business operations through financial statements.
These statements can be a balance sheet, a cash flow statement, and an income statement. They demonstrate the organization’s overall performance at a specific time.
Generally, these statements are external and they are given to people who are interested in receiving such information about a certain company in order to make decisions properly. They can be banks, stakeholders, government agencies, employees, and so on.
It should be noted, that the main objective of financial accounting is to provide appropriate information to outside sources in order to evaluate the merit of the company for itself.
Scope of Financial Accounting
- Noting the Financial Transactions
- Producing Financial Statements
- Classification of Information
- Explaining Financial Information
- Management of Finances
- Financial Accounting Career Options
- Functions of Financial Accounting
1. Noting the Financial Transactions
As we have mentioned above, financial accounting means writing down every financial transaction of the business organization. It’s an extremely important component of every business because it’s impossible for humans to memorize all financial transactions without recording them.
Generally, they are put down in journals or subsidiary books in a systematic way which gives everyone the opportunity to easily check if there is some kind of issue.
2. Producing Financial Statements
Financial statements include a balance sheet, income statement, and cash flow statement. Financial accounting arranges these statements and they represent the accurate financial position of the company.
This way people who are interested in a certain organization can assess its strength and weaknesses and make decisions properly. Financial statements are the result of analyzing and collecting various information in the process of financial accounting.
3. Classification of Information
One of the most significant steps of financial accounting is to classify and arrange information properly based on its nature. When all the information is collected it needs to be summarized in order to read and understand it properly.
Therefore, every transaction of a similar nature is grouped together in one head. Companies can make different accounts such as Purchases, Rent, Sales, Salaries, Interest, and so on.
In order to easily comprehend the collected information, they have to make sure that it is classified thoroughly.
4. Explaining Financial Information
Although classifying the information is a very important step in financial accounting it should be noted, that this whole process is meaningless if the financial information is not interpreted properly.
When the financial statements are prepared and as a result, outside sources get an appropriate understanding of the financial situation inside the company and making it easy for them to make a decision.
This is a very convenient way to explain financial information to somebody who has limited or no knowledge of accounting subjects, as the information is simplified and easy to understand.
Financial accounting makes way easier for outside parties to communicate with the organization and find out all the details regarding the financial situation.
It forms an accurate picture of the company’s financial affairs that can be assessed by every outside source who has an interest in this organization. This is a routine process and everyone is aware of any updates as every detail is noted in financial reports.
As we have already highlighted, this is an extremely effective process that helps interested parties to evaluate their strength and weaknesses and make appropriate decisions based on these reports.
6. Management of Finances
It’s extremely important for every business organization to determine and maintain its financial position. This can be achieved by successful financial accounting, as it is capable of establishing a fair and actual image of the company’s financial situation.
Every business owner should realize that mismanaging your financial resources can result in poor overall performance, so it’s necessary to analyze and record every financial aspect of the business.
We have highlighted several times that effective financial accounting helps interested outside parties to evaluate the strength and weaknesses of the organization and make decisions based on it.
In addition, it is a great way for the internal management team to keep track of the company’s successful functioning and make some necessary changes whenever required.
This way they are able to improve the organization’s overall performance and maintain the proper financial position.
7. Financial Accounting Career Options
There are various jobs all over the industry for everyone looking forward to developing a financial accounting career. These jobs are offered in banks, investment banks, building societies, public sector companies, insurance companies, and so on.
Generally, the graduates who enter this field will train in public practice and they will be offering business advice and audit to clients.
The job roles for financial accounting include accountant, chartered accountant, financial accountant, management consultant, accounting technician, and chartered management accountant.
8. Functions of Financial Accounting
There are two types of functions of financial accounting – historical and managerial functions. Historical functioning means recording and representing every past transaction made in the business. It includes many steps in the process that should be carried out accurately.
Managerial functioning means assessing the old records provided by accounting in order to make smooth and effective decisions.
Every internal management team should be aware of this process as it provides the opportunity to easily manage the finances and enhance the overall performance of the company.
First of all, it helps outside parties who are interested to make some investments to easily evaluate the current financial situation of the company by looking at financial statements.
This way they can make decisions accurately as the information is classified and represented properly.
On the other hand, it’s a great way for the internal management team to keep track of operations and make some necessary changes in order to maintain the successful performance of the organization.
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