Financial accountingis the process by which an organization's revenue, receivables and expenses are collected, measured, recorded and finally reported into a financial statement. This process is designed to accurately reflect business activity; help companies meet legal, fiscal and statutory requirements; present financial accounts to business owners; allow for in-depth financial analysis; and facilitate efficient resource allocation. The main purpose of financial accounting is to allow third parties to assess the value of a company.
Across financial accounting, companies have two basic ways that they can structure their business’s accounting policy. Publicly traded companies must use the accrual accounting method which is standardized under generally accepted accounting principles (GAAP). The accrual method reports revenues as they are accrued as opposed to when they are received and expenses are reported as they are incurred rather than when they are paid. Many private companies also use GAAP but they are not required to do so. Private companies also have the option to use the cash accounting method.
The Purpose of Financial Statements
In a practical sense, the main objective of financial accounting is to accurately prepare an organization's financial accounts for a specific period, otherwise known asfinancial statements. The three primary financial statements are theincome statement, thebalance sheetand thestatement of cash flows.
A company’s financial statements serve several purposes. They provide important information to shareholdersand loancreditors, which can help to improve investment interest. The financial statements are used internally by management to manage both the current operations and future activities of the firm. The financial statements also provide information for all types of investors to prepare an analysis using trends, ratios and industry comparisons.
The American Institute of Certified Public Accountants (AICPA)
The American Institute of Certified Public Accountants (AICPA) is an industry-leading organization in the area of financial accounting. They have over 431,000 members worldwide. The AICPA is a leading source for research and alerts on topics of interest in the accounting profession. The AICPA is also responsible for developing and grading the Uniform CPA Exam.
In 1973, the AICPA released a study entitled "The Objectives of Financial Statements." The study was pivotal for the accounting industry with objectives adopted by the Financial Accounting Standards Board (FASB). The basis of the AICPA’s 1973 study reported that financial statements were primarily useful for helping multiple parties make financial decisions. The study was also released the same year that the FASB was created, which replaced the work of the AICPA in developing accounting standards for the accounting industry. Today financial accounting standards and objectives can be found through the FASB’s website.
Financial Reporting Standards
In the United States, financial reporting standards are set forth by the FASB and required under GAAP for publicly traded companies. The FASB is contracted out by theSecurities and Exchange Commission (SEC) to control the approved methods and applications of financial accounting. Following these reporting standards makes it easier for individuals to understand the financial statements of various companies, as they are presented in the same manner and therefore easier to follow.
Financial accounting is normally performed by those individuals who have studied the methods, concepts, history, and laws related to its practice. In the U.S., these individuals are referred to ascertified public accountants (CPA). The SEC requires that public companies annually report their financial statements and that this reporting is done by an impartial third party, which is where CPAs come in to play. This ensures that the financial statements have been properly created under all required policies.
FAQs
This process is designed to accurately reflect business activity; help companies meet legal, fiscal and statutory requirements; present financial accounts to business owners; allow for in-depth financial analysis; and facilitate efficient resource allocation.
What is the main objective of financial accounting answer? ›
Financial accounting's primary goal is to generate financial reports that convey information about a company's performance to external parties such as investors, creditors and more. How do you keep your accounting records accurate? There are various methods for keeping accurate records.
What are the objectives for financial accountant? ›
Here is a list of the six essential goals and job functions of accounting positions within a company:
- Measure profit and loss accurately. ...
- Ensure company compliance. ...
- Report on financial positioning. ...
- Keep meticulous records. ...
- Complete internal and external audits. ...
- Improve financial outcomes.
The primary objectives of financial accounting are to provide information that is useful in making investment and credit decisions; in assessing the amount, timing, and uncertainty of future cash flows; and in learning about the enterprise's economic resources, claims to resources, and changes in claims to resources.
What are the 4 objectives of accounting? ›
The four main objectives of accounting are to provide information that is useful in making business and economic decisions, to measure the financial performance of a business, to comply with legal and regulatory requirements, and to support the planning and control activities of a business.
What is a major objective of financial accounting and reporting? ›
Provide Information to Users: The main objective of financial reporting is to provide high-quality financial information about a company to external users, such as investors, lenders, and creditors.
What is the primary objective of financial accounting and reporting? ›
According to FASB Statement of Financial Accounting Concepts No. One, the primary objective of financial reporting is to provide useful information so that investors, creditors and other users can make rational decisions.
What is an example of a financial objective? ›
A company might create an objective to increase its revenue to finance business growth, employee salaries and bonuses or to expand into other markets. With increased revenue, companies have more capital to reinvest into the company to encourage growth, innovation and employee satisfaction.
What are the objectives of accounting explain any three? ›
Accounting in any business has the following goals: to systematically record transactions, classify and analyse them, generate financial statements, evaluate the financial status, and support decision-making with financial facts and knowledge of the firm.
What is an example of an objective for an accountant? ›
Objective examples
Driven accounting professional with established knowledge of accounting principles to execute in-depth financial audits and deliver comprehensive financial reports. Seeking a more challenging positon within an organization that allows for further career advancement.
To provide financial information that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the reporting entity. 2. According to the European Accounting Association: Capital maintenance is a competing objective of financial reporting.
Which of these is a financial objective? ›
There are six types of financial objectives: revenue objectives, cost objectives, profit objectives, cash flow objectives, investment objectives and capital structure objectives. Financial objectives can be set by both enterprises and individuals.
What are the 5 objectives of accounting? ›
Explanation: Objectives of accounting in any business are; systematically record transactions, sort and analyzing them, prepare financial statements, assessing the financial position, and aid in decision making with financial data and information about the business.
What are the 5 main purposes of accounting? ›
The five essential roles of accounting in information systems are data gathering, data processing, data analysis, financial management, and compliance and risk management.
What are the golden rules of accounting? ›
What are the Golden Rules of Accounting? 1) Debit what comes in - credit what goes out. 2) Credit the giver and Debit the Receiver. 3) Credit all income and debit all expenses.
Which of the following is the main objective of financial statements? ›
The main objective of financial statements is to provide information about the earning capacity of the business and cash flows.
What is financial objective? ›
A financial objective is a goal that businesses set for financial success and growth. A company's financial objectives can vary depending on multiple factors, such as the type of products and services it offers, how it operates and what its current requirements are.
