What is financial accounting?
We explain what financial accounting is, its requirements and objectives. Also, what is fiscal and administrative accounting.
Financial accounting is dedicated to the financial transactions of a business.
Financial accounting is a branch of accounting dedicated specifically to the financial transactions of a business.
This involves summarizing, analyzing, and reporting to the general public, shareholders of a company, or government agencies engaged in fiscal oversight, and from that information strategic decisions are often made within the organization.
Financial accounting is responsible for keeping records of the economic history of any organization, and along with cost accounting and administrative accounting, makes up the accounting structure of the same.
As the consumers of this information are usually entities external to the organization, it is also known as external accounting.
This branch of accounting is governed by national and international standards enshrined in the financial laws of the countries or regions. To that extent, it must comply with the following requirements:
- Relevance. The information gathered should be relevant to decision making, as there is no other reason to undertake such studies. The reports are expected to be as thorough and complete as possible.
- Materiality. The information contained in such reports is considered material when it may substantially influence the benefit or detriment of real economic actors of the company.
- Reliability. All accounting exercises must be truthful, free from errors or biases that could alter their content.
- Understandable. Any accounting information must be legible by its target public and cannot have keys or hermetic languages.
- Comparable. Accounting reports can be collated to provide an assessment of different periods and to draw conclusions about the company’s performance.
Objectives of financial accounting
Financial accounting records the organization’s operations.
Financial accounting has the following objectives:
- To offer truthful and useful information about the financial situation of a company and the profit obtained by it.
- To create a business economic memory recording the operations carried out by the organization.
- Provide information regarding a company’s operating results, financial position and cash flows.
Tax accounting criteria vary depending on where the company operates.
Tax accounting is concerned with supervising and recording the operations of a company with respect to its tax obligations, based on the obligations contracted by any company under the legal framework in force in a nation.
Thus, tax accounting criteria will vary according to where the company operates, but it is always of great importance for the preservation of the company’s assets as well as its public image, as irresponsible handling of its taxes could be extremely counterproductive.
The administrative accounting informs the financial situation of the company.
This is a branch of accounting that keeps the company’s administration, i.e. its management, informed of the financial situation of the organisation and the recording of its economic movements.
This is why it is known as managerial accounting, since it prioritizes the usefulness of its information to allow the most accurate and informed management decisions possible.
Along with cost accounting and financial accounting, administrative accounting forms the accounting structure within any company or organization.