FINANCIAL ACCOUNTING

Introduction to Financial Accounting

Financial accounting is a specialized branch of accounting that keeps track of a company's financial transactions. Using standardized guidelines, the transactions are recorded, summarized, and presented in a financial report or financial statement such as an income statement or a balance sheet.

Companies issue financial statements on a routine schedule. The statements are considered external because they are given to people outside of the company, with the primary recipients being owners/stockholders, as well as certain lenders. If a corporation's stock is publicly traded, however, its financial statements (and other financial reportings) tend to be widely circulated, and information will likely reach secondary recipients such as competitors, customers, employees, labor organizations, and investment analysts.

It's important to point out that the purpose of financial accounting is not to report the value of a company. Rather, its purpose is to provide enough information for others to assess the value of a company for themselves.

Because external financial statements are used by a variety of people in a variety of ways, financial accounting has common rules known as accounting standards and as generally accepted accounting principles (GAAP). In the U.S., the Financial Accounting Standards Board (FASB)  is the organization that develops the accounting standards and principles. Corporations whose stock is publicly traded must also comply with the reporting requirements of the Securities and Exchange Commission (SEC), an agency of the U.S. government.

• Financial information about business: Accounting makes available financial information ie. the profit earned or loss suffered and also what are the assets and liabilities of the enterprise.To provide information useful for the making economic decision.
• To serve primarily those users who have limited authority ability or resource to obtain information and who rely on the financial statement as their principal source of information about the economic activities of an enterprise.
• Facilitates comparative study: To provide information useful to investors and creditors for predicting comparing and evaluating cash flow in terms of amount timing and related uncertainty.
• To provide users with information for predicting comparing and evaluating the earning power of the enterprise.
• Assistance to Manager: The management responsible for the function of the business and has to, therefore, plan to make decisions and exercise effective control over the affairs of the business.The management performs these function on the basis of accounting information. To supply useful information in judgment the management ‘s ability to utilize enterprise resources effectively for achieving the primary enterprise goals.
• To provide factual and interpretive information about the transaction that is useful for predicting comparing and evaluating the earning power of an enterprise.
• Replace memory: No business man can remember everything about his business since human memory has limitation.It is necessary to record the transaction in the book of accounts promptly.There is no necessity of remembering various transaction since on need the records will furnish the necessary information.
• Facilitates loan: Loan is granted by the bank and financial institution on the basis of growth potential which is supported by the performance.Accounting makes available the information with respect to performance.

Some important activities  financial accounting includes :

1. It helps to prepare in bank reconciliation statement.
2. Financial reporting for movement and banks and shareholders.
3. It helps in debtor and creditor reconciliation
4. It helps in bookkeeping of the organization.
5. it helps in tax management.
6. It helps in payroll processing.

Disadvantages of Financial Accounting

Accounting is not fully exact: Accounting is influenced by the personal judgment in respect of various terms.People are bound to have different ideas and the estimates will naturally differ from person to person.Thus this will lead to the different amount of profit shown by a different person.Thus the profit cannot be treated as exact.

Accounting does not indicate the releasable value: The balance sheet does not show the amount of cash which the firm may realize by the sale of all assets.

Accounting ignores qualitative elements: Since accounting is confined to monetary matters only qualitative elements like a quality of management and labor force industrial relations and public relations are ignored.

Accounting ignores the effect of price level change: Accounting statement is prepared at historical cost.Money as measurement unit change in value. It does not remain stable.The financial statement does not show the effect of the change in price level.The assets remain to undervalue in many case particular land and building So while preparing financial statement accounting information will not show the true result.

Accounting may lead to window dressing: 

The term window dressing means manipulation of accounts in a way so as to conceal vital facts and present the financial statement in a way to show better position than what it is actually.In this solution, income statement fails to provide a true and fair view of the result of the operation and the balance sheet fails to provide a true and fair view of the financial position of the enterprise standards and principles. Corporations whose stock is publicly traded must also comply with the reporting requirements of the Securities and Exchange Commission (SEC), an agency of the U.S. government.