What are the Objectives of Financial Accounting?

Financial accounting is the field of accounting concerned with the summary, analysis, and reporting of financial transactions related to a business.

This involves the preparation of financial statements available for public use. Stockholders, suppliers, banks, employees, government agencies, business owners, and other stakeholders are examples of people interested in receiving such information for decision-making purposes.

Objectives of Financial Accounting

The objective of financial accounting statements is to serve the needs of equity investors. Measurement of earning power is, however, the common denominator of all users’ needs for accounting information.

Although the performance of management is the subject of corporate reports, management must continue to bear responsibility for the reporting function.

If management sets the standards of measurement, however, the measure may become a rubber yardstick aimed at suiting the needs of management rather than the statement user; the accounting profession performs a central role in setting the standards of measurement.

Financial accountancy is governed by both local and international accounting standards. Generally Accepted Accounting Principles (GAAP) is the standard framework of guidelines for financial accounting used in any given jurisdiction.

It includes the standards, conventions, and rules that accountants follow in recording and summarizing, and in the preparation of financial statements.

Now let us look at the Objectives of Financial Accounting.

Keeping accounts of cash

Cashbook is a prominent book of the books of accounts.

Cash receipts and cash payments are accounted for in this book. A number of daily cash receipts, payments, cash in hand, and cash at the bank can be known from this book.

Fraud, forgery, and misappropriation of money are reduced by keeping cash books scientifically and accurately.

Revealing The Financial Position Of The Firm

The soundness of the financial position of a firm ensures its survival and growth. Therefore financial accounting aims at revealing the soundness of its financial position by preparing the balance sheet.

Reporting Past Performance And Future Prospect

The shareholders of the firm want to ensure security and growth in the value of their investment. Therefore, financial accounting seeks to report to the shareholders about the firm’s past performances and future prospects.

Interprets Financial Information

Financial accounting interprets information from analysis conducted and financial statements prepared. It understands and explains the results of several relationships established by analysis to different users for easy understanding and decision making. It simplifies the accounting information so that it is well understood by persons having limited or no knowledge of accounting subjects.

Compliance with Statutory Requirements

One of the objectives is to ensure compliance with local laws related to taxation, the companies Act and other statutory requirements relevant to the country where the business undertakes. It ensures that the business affairs adhere to such laws and relevant provisions comply while business is conducted.

Safeguarding of Interest of Various Stakeholders

It provides suitable and relevant information related to business operations to various stakeholders such as Shareholders, Prospective Investors, Financers, customers, creditors.

They are not just appropriate for those who are having existing business relationships but also for those who are interested in having future collaboration with the business by providing them with meaningful information about the business.

Helps in the Measurement of Profit and Loss of Business

It measures the profitability of the business for a particular period and discloses the net profit or loss of the business as a whole. It also exhibits the Assets and Liabilities of the business.

Presentation of Historical Records

It focuses on the presentation of historical records and not on forecasting the future, unlike other accounting. The primary rationale is the preparation of Financial Accounts is the ascertainment of profit earned or loss incurred by the business in the period concerned.

Reliability and Relevance

An important objective is to prepare such financial statements that are reliable, and decisions can be based on them.

For this purpose, such Accounting should represent a faithful representation of transactions and events undertaken by the business, should be represented in their actual substance and economic reality perspective.

Easy to Understand

  • Among all the objectives discussed above, it is the primary objective that Financial Accounts are prepared in such a way that they are easily understandable by intended users.
  • However, while meeting this objective in mind, it must be equally essential to ensure that no material information is omitted because it will be complex and cumbersome to understand for various users.

Ascertaining Profit Or Loss

To ascertain whether the organization has earned profit or incurred loss an Income statement or Trading and profit & loss account is prepared. The income statement gives the data of profit and loss of a financial year. The balance sheet gives the overall position of the organization.

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