Financial Accounting is concerned with the production of financial statements for external users. Investors need to be able to choose which companies to invest in and compare investments. In order to facilitate comparison, financial accounts are prepared using accepted accounting conventions and standards. International Accounting Standards (IASs) and International Financial Reporting Standards (IFRSs) help to reduce the differences in the way that companies draw up their financial statements in different countries. The financial statements are public documents, and therefore they will not reveal details about, for instance, individual products’ profitability.
Financial accounting provides information to decision makers who are external to the business. To understand the role of financial accounting, consider a large corporation such as IBM. The owners of corporations are called shareholders, and IBM has more than 600,000 shareholders. Obviously, each shareholder cannot participate directly in the running of IBM, and because IBM needs to maintain various trade secrets, its many thousands of shareholders are not permitted access to much of the firm’s information. Because of this, shareholders delegate most of their decision making power to the corporation’s board of directors and officers. Shareholders, however, need information to evaluate the performance of the business and the advisability of retaining their investment in the business. Financial accounting provides some of the information for this purpose; such information is also used by potential shareholders who are considering an investment in the business.
Creditors and potential creditors are also served by financial accounting. Firms often seek loans from banks, insurance companies, and other lenders. Although creditors are not internal parties of those firms, they need information about them so that funds are loaned only to credit-worthy organizations. Financial accounting will usually provide at least some of the information needed by these decision makers.
This Financial Accounting tutorial is useful for B.Com, B.B.A., M.Com., M.B.A., C.S., CA., LCW.A. students and professionals. Every lesson is logically set and graded. This tutorial is organized into main chapters and then into subtopics in order to make yourself comfortable learning Financial Accounting.
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Financial Accounting Method has first step in collecting business data and information is compiling a set of adequate definitions of the categories concerned so that there can be no confusion one the part of the reporters. In the private business organization there is some confusion in revenue between taxable and nontaxable sales, and there is always the possibility of confusion in classification of business expenses unless they are carefully designated by accountant. In the modern commercial world there are various manuals of accounts published by trade associations, each adapted to specific business needs.
There is no single authoritative and generally accepted definition of financial accounting, or of accounting in general. It began as a practical activity in response to perceived needs, and for most of its development it has progressed in the same way, adapting to meet changes in the demands made on it. Where the needs differed in different countries or environments, accounting tended to develop in different ways as a response to a particular environment, essentially on the Darwinian principle: useful accounting survived. Because accounting developed in different ways, it is likely that definitions suggested in different contextual surroundings will vary.
At a general level it is at least safe to say that accounting exists to provide a service. In the box below there are three definitions. These have all been taken from the same economic and cultural source (the United States) because that country has the longest history of attempting explicit definitions of this type. Note that each suggested definition seems broader than the previous one, and the third one, from 1970, does not restrict accounting to financially quantifiable information at all. Many would not accept this last point even in the US context and, as will be explored at length in this book, attitudes to accounting and its role differ substantially around the world and certainly between European countries.
The Objective of Financial Accounting
An important beginning point for understanding the social role and importance of financial accounting is identifying the objective that it should meet. Although there are many opinions as to what the objective should be, the most authoritative and influential is this definition provided by the Financial Accounting Standards Board (FASB) in its Conceptual Framework project, which was intended to develop a unified theory of accounting
Financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions. Thus, according to this definition, the goal is to provide information that allows users to reach better decisions than they would without it. (For simplicity, the FASB uses the term financial reporting to encompass the activities of “financial accounting and reporting,” which includes presenting both financial statements and the additional financial information that accompanies them. This chapter uses the term financial accounting in this broader sense.)
Usefulness may exist at the individual company level if management provides reports to investors and creditors when seeking financing or fulfilling various stewardship reporting responsibilities. Although this perspective undoubtedly explains why some aspects of accounting are regulated, it does not really provide an adequate basis for understanding the substantial governing structure. Instead, an economy-wide perspective is needed.
Financial Accounting Chapters
- Introduction to Accounting
- Balance sheet
- Income Statement
- Cash Flow Statement
- Current Assets
- Non Current Assets
- Current Liabilities
- Non Current Liabilities
- Shareholders Equity