Financial Accounting | Meaning | Objectives | Functions | Limitations
Arjun EP
Financial Accounting | Meaning of Financial Accounting
Financial accounting is a branch of accounting specialized in company’s financial transactions.
This branch records financial transactions by using standardized guidelines.
Then summarized and presented in a financial statement.
It includes income statement, retained earnings, balance sheet and cash flow statement.
Company issues financial statements to out siders on a routine schedule.
These outsiders are internal and external users of financial statements.
They are shareholders, lenders, creditors, competitors, customers, employees, labour organizations and investment analysts etc.
Financial accounting uses common rules known as accounting standards.
Generally accepted accounting principles (GAAP), the Financial Accounting Standards Board (FASB), the Securities and Exchange Commission (SEC) are used while preparing financial statements.
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Features of Financial Accounting | Characteristics of Financial Accounting
The major features of financial accounting are as follow:
Monetary transactions
Financial accounting records only monetary transactions.
Monetary means related to money.
It does not record any non-monetary transaction such as value of skilled labour and machine shut down due to load shedding.
Based on concepts
Financial accounting is based on accounting concepts like generally accepted accounting principles (GAAP), the Financial Accounting Standards Board (FASB).
These accounting concepts are followed worldwide.
Historical nature
Financial accounting records only took placed monetary transaction.
These transactions are historical in nature because they have already occurred.
It does not record any estimated or forecasting transactions.
Legal requirement
For Joint Stock Company, it is necessary to prepare financials statements.
It is legal requirement.
It is obligatory to get audited these statements from auditor.
These financial statements must to submit to company registrar office each accounting year.
External use
Generally, company prepares financial accounting for its external users.
They are investors, customers, suppliers, consumers, financial institutions etc.
They use financial statements to compare interest, dividend, price of goods or service etc.
Financial accounting process
Different accountants follow different accounting policies.
The process of financial accounting gets affected due to the different accounting policies.
Main different accounting policies are valuation of inventory and calculation of depreciation.
Bases for other accounting
Financial accounting forms the bases for other branches of accounting.
They are cost accounting, management accounting, tax accounting etc.
Finance is totally depended on financial accounting.
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Cost Reconciliation Statement |
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Unit Costing (Output Costing) |
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Functions of Financial Accounting
There are many functions of financial accounting. The major functions are as under:
Recording
Recording is the basic function of financial accounting.
It is principally based on all financial transactions of business.
These financial transactions are recorded in chronological order.
They are initially recorded in the journal entries.
Classification
After recording financial transactions in journal entries, they are classified into different related group according to their nature.
The work of classification is done in the book of ledger account.
Summarising
Classified data (ledger account) are summarised into trial balance.
Arithmetic accuracy is checked from trial balance.
From trial balance, different financial statements like trading account, profit and loss account and balance sheet are prepared at the end of accounting period.
Analysis and interpretation
The recorded financial data is analyzed.
It is interpreted in a manner that the end-users can make a meaningful judgment about the financial condition.
The data is also used for preparing the future plans and framing of policies for executing such plans in actions.
Communication
Different analysed and interpreted accounting information are to be communicated to the different interested parties.
They are shareholders, creditors, investors and trade union etc.
These are equally useful to management itself.
They use this information for various purposes according to their need.
This is done through preparation of accounting ratios, graphs, diagrams, funds flow statements etc.
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Accounting Equation |
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Journal Entries in Nepali |
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Journal Entries |
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Journal Entry and Ledger |
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Ledger |
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Subsidiary Book |
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Cashbook |
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Trial Balance and Adjusted Trial Balance |
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Bank Reconciliation Statement (BRS) |
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Depreciation |
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Financial Accounting and Analysis (All videos) |
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Accounting Process |
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Accounting for Long Lived Assets |
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Analysis of Financial Statement |
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Objectives or Importance of Financial Accounting
What are the major objectives or importance of financial accounting?
The primary objectives or importance of financial accounting are as under:
Keep transactions
The main objectives of financial accounting are to keep financial transactions in systematics way.
Whenever, accounting data are needed is future, It will help to find out easily.
Find out profit or loss
Other objectives of financial accounting are to find out profit or loss of the organization.
It helps to find out profit or loss of the organization in an accounting year by preparing income statement (profit and loss account).
Find out financial position
Financial accounting helps to find out financial position of the organization in an accounting year by preparing balance sheet.
Balance sheet can be prepared for single year as well as comparative years.
Provide information
Financial accounting provides necessary information and upto date to related users.
Users are internal and external like management, creditors, employees and government etc.
They take decision according to their need by comparing financial statement.
Fix the tax
Every state and country charges tax on income.
Income may be either personal or firm.
Accounting helps to fixation of tax to pay the government in an accounting year.
Keep in Mind (KIM)
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The importance of financial accounting can be understood by answering following questions: |
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How much was earned last year? How much we have earned this year? Is our business improving? How much cash do we have? How much loan we have taken? How much investment we have done? |
Limitation of Financial Accounting
Financial accounting contains journal entries, ledgers, trading account, profit and loss account, balance sheet, cash flow statement etc.
These accounts are helpful for cash position, assets and liabilities of organization.
But it has following limitations:
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a. |
Financial accounting does not give detail information about cost of product or service. |
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b. |
It does not record detail information about inventory control, standard costing, budgetary control, marginal costing etc. |
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c. |
It is based on history or past data so it does not compute pre determine costs. |
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d. |
In financial accounting, costs are not classified according to direct and indirect cost, fixed and variable cost, controllable and uncontrollable cost etc. |
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e. |
It does not analysis about idle time of labour, idle time of machine, inefficiency of labour etc. |
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f. |
Financial accounting fails to provide information about introduction of new product, make or buy decision, replacement of labour and machine etc. |
Differences between Cost Accounting and Financial Accounting
Cost accounting
Cost accounting is related to manufacturing.
In cost accounting, raw materials are converted into work-in-progress or finished goods with the help of men and machine.
Financial accounting
Financial accounting is a branch of accounting specialized in company’s financial transactions.
This branch records financial transactions by using standardized guidelines.
Then summarized and presented in a financial statement.
It includes income statement, retained earnings, balance sheet and cash flow statement.
Differences between Cost Accounting and Financial Accounting
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Bases |
Cost Accounting |
Financial Accounting |
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Purpose |
The main purpose of cost accounting is to provide information to management about planning, control and take decision. |
The main purpose of financial accounting is to provide information about financial position of the business. |
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Past, present or future |
Cost accounting is related to past and future. It is based on estimation and actual facts |
Financial accounting is related to past. It is based on actual facts |
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Period |
There is no limit for preparing cost accounting. It is prepared when management needs to take decision. |
Generally, it is prepared for one accounting period. This period is annual. |
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Cost control |
It helps to cost control. Like materials, labour and overhead cost control. |
Its purpose is not to control cost. |
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Stock valuation |
Stock/inventory is valued at cost price basis. |
Stock or inventory is valued at cost or market, which is less. |
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Transactions |
Cost accounting is related to internal affairs. |
Financial accounting is related to external affairs. |
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