In: Accounting
What is the function and primary focus of financial accounting?
A company's external stakeholders, including investors, creditors, regulators, and the general public, should be informed about its financial performance and situation. This is the main purpose of financial accounting. This entails the systematic recording, summarizing, and reporting of financial transactions and events of an organization in line with generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS).
The basic goal of financial accounting is to generate financial statements that represent a company's financial health. These financial statements include the following:
1.The income statement, sometimes referred to as the statement of profit and loss or the statement of comprehensive income, lists the revenues, costs, gains, and losses that a business experienced over a certain time period. It aids stakeholders in evaluating the company's operating efficiency and profitability.
2.The balance sheet, commonly referred to as the statement of financial position, gives an overview of a company's financial situation at a certain point in time. It aids stakeholders in assessing the company's liquidity, solvency, and general financial stability by outlining the assets, liabilities, and shareholders' equity of the business.
3.The cash inflows and outflows from operating, investing, and financing operations are tracked in the cash flow statement. It enables stakeholders to evaluate the company's cash generation and cash management procedures.
4.Statement of Changes in Equity: This statement depicts the changes in shareholders' equity during a certain time period, including contributions, distributions, and other changes influencing the equity accounts.
These financial statements are prepared on an accrual basis, which means that revenues and costs are recognized when they are received or spent, regardless of actual cash flow. Other activities in financial accounting include recording adjusting entries, calculating depreciation and amortization, valuing inventories, and applying appropriate accounting rules and standards to assure the correctness and dependability of financial data.
In general, financial accounting's main objective is to offer comparable, accurate, and pertinent financial data so that outside users may assess a company's performance, profitability, and financial stability and identify prospective investment possibilities.