Financial Accounting

The information available in the financial statement is useful in making an investment decision. Apart from the investors, the financial statements are useful to a wide range of people both inside and outside the organization. They are the end products of a process called financial accounting. In this article we are briefing on the term ‘financial accounting’.

The American Institute of Certified Public Accountants defined accounting as “the art of recording, classifying and summarizing in a significant manner and in terms of money transactions and events which are, in part at least, of a financial character, and interpreting the result there of”.

Now, what does this mean? In other words, (a) accounting is recording transaction of a financial nature in terms of money (b) classifying and summarizing the transaction the transactions in such a way that it represents the significance of all the transactions and events and (c) interpreting the end product of the classification and summarization.

Financial accounting has various advantages as it is useful to various users. Some of the users are internal to the organization whereas others are external.

The internal users are:

1. Management: The management of the company needs financial information for planning and controlling the company’s operations.

2. Shareholders: Shareholders of a company come to know of the operations and financial position of the company only through the annual financial statements.

3. Labor: The bonus payable to workers depends on the profits earned by the Company. Therefore the workers of the company are interested in knowing whether the company made a profit or a loss. Apart from this employees are also interested in knowing the financial position of the company for which they are working.

The external users are:

1. Investors: Those intending to invest in the company are naturally interested in knowing about the profitability and financial position of the company which is provided by the financial statements.

2. Regulatory and Taxing Authorities: The audited financial statements are the basis for calculating the tax liability of the company.

3. Creditors: The creditors of the company often want to satisfy themselves of the financial health of the company before lending. This also includes banks and financial institutions.