Financial accounting aims to achieve operational management of business-related accounting transactions. Focuses on collecting transaction-specific details and recording, summarizing, and reporting them in a structured and available format. This process is designed to help companies maintain detailed records to help them meet their legal and constructive obligations.
1) Record keeping
Accounting begins when the books enter transactions in the accounting records. When entering a transaction into an accounting system, it must be supported by relevant and reliable evidence. This accounting record can be used for a variety of purposes, including internal and external audits. The enterprise must have complete accounting records and no significant false statements or omissions.
2) Profit/loss measurement
Businesses need to ensure that they have recorded full economic activity to earn and pay for economic benefits. At the end of the accounting period, all transactions related to revenue and expenses are summarized in the income statement to assess whether the business has occurred in profit or loss.
3) Preparation of financial statement
Financial statements are summarized from data entered into the accounting system. Financial statements cannot be prepared without effective financial accounting operations. Because financial statements are the primary deliverables of financial accounting functions, strong business operations related to bookkeeping, data entry, periodic adjustment, and closing produce reliable financial statements.
4) Cash flow management
Companies must be able to predict and manage liquidity. In general, a forecasted cash flow statement is prepared using past financial trends extracted from past accounting records and data.
5) Understand the financing needs of the business
Financial accounting helps companies understand whether they need to raise funds. It can be done by analyzing the current funding structure and comparing the available funds to the project needs.
6) Periodic reporting and financial analysis
Financial information is displayed by period, which means that the financial performance of one period can be compared to another to ensure that the situation is normal. Industry comparison is a good idea to assess whether the business is doing well. Ratio calculations can help you improve analytical understanding and identify specific areas of improvement, as well as periodic comparisons.
7) Business valuation
The technology to calculate business value requires input from financial accounting and business financial records. The discounted cash flow model uses past cash flows obtained from the review of the cash flow statement.
8) Filing taxation
Tax obligations depend on the profits earned from the business. Therefore, the exact amount of tax liabilities can only be calculated if the operator calculates the profit correctly. In order to calculate the exact tax liabilities, you need to extract detailed financial records of revenues, expenses, liabilities, assets, capital, etc.
9) Operations management
Business managers must make operational decisions from time to time. The administrator needs information before performing the specified activity. This input is extracted from financial records generated by financial accounting.
10) Meeting regulator’s expectations
Regulators require companies to comply with certain operating standards. Regulators vary from business to business. These regulators require companies to provide financial and operational records from time to time, and failure to comply may result in certain financial impacts and disadvantages.
Conclusion
Financial accounting is the process of identifying, recording, and reporting financial information of an enterprise. Multiple objectives should be achieved, including appropriate record keeping, profit and loss measurement, preparation of financial statements, cash flow management, business evaluation, tax reporting, and financial analysis.
References
University of Nevada, Reno. What is financial accounting and why is it important? (2022) University of Nevada, Reno. Available at: https://onlinedegrees.unr.edu/master-of-accountancy/resources/what-is-financial-accounting/ (Accessed: November 10, 2022).
Kenton, W. (2023) Financial accounting meaning, principles, and why it matters, Investopedia. Investopedia. Available at: https://www.investopedia.com/terms/f/financialaccounting.asp (Accessed: November 10, 2022).
