To meet the requirements of different people interested in accounting information, accounting can be broadly classified into three categories:
- Financial Accounting,
- Cost Accounting,
- Management Accounting
Now we are going to discuss about financial accounting, its objects and functions.
Financial Accounting may be defined as the art of recording, classifying and summarising in a significant manner in terms of money transaction and events which are in part at least of financial character, and interpreting the result thereof. Accounting is the language effectively employed to communicate the financial information of a business unit of various parties in its progress.
Object of Financial Accounting
The object of financial accounting is to find out the profitability and to provide information about the financial position of the concern. Two important statement of financial accounting are Income & Expenditure Statement and Balance Sheet. All revenue transaction relating to a particular period is recorded in this statement to decide the profitability of a concern. The Balance Sheet is prepared at a particular date to determine the financial position of a concern.
Functions of Financial Accounting
Financial accounting provides information regarding the status of the business and result of its operations to management as well as to external parties. The following are some of the important functions of financial accounting:
- Recording of Information
In business, it is not possible to keep in memory all the transactions. These transaction need to be systematically recorded and pass through the journals, ledgers and worksheet before they could take the form of final accounts. Only, those transaction are recorded which are measurable in terms of money. The transaction which can not expressed in monetary terms do not form part of financial accounting even though such transaction have a significant bearing on the working of a business.
- Managerial Decision Making
Financial accounting is greatly helpful for managers in taking decisions. Without accounting, the managerial functions and decision making programmes may mislead. The performance of daily activities is to be compared with the predetermined standards. The variations of actual operations and their analysis are possible only with the help of financial accounting.
- Interpreting Financial Information
Interpretation of financial information is very important for decision making. The recorded financial data is interpreted in such a manner that the end users such as creditors, investors, bankers etc, can make a meaningful judgement about the financial position and profitability of the business operations.
- Communicating Results
Financial accounting is not only concerned with the recording of facts and figures but it is also connected with the communication of results. In fact accounting is the source of business operation. Therefore, the information accumulated and measured should be periodically communicated to the users. The information is communicated through statements and reports. The financial statements and reports should reliable and accurate. A variety of reports are needed for internal management depending upon its requirement. In communicating reports to outsiders, standard criteria of full disclosers, materiality, consistency and fairness should be adhered to.