What are the Objectives of Financial Accounting?
The primary objective of Financial Accounting is to reveal the profits and losses of the business and provide a true and fair view of the business which is aimed at safeguarding the interest of various stakeholders internal as well as external which are connected to the business.
Objectives of Financial Accounting
#1 – Compliance with Statutory Requirements
One of the objectives is to ensure compliance with local laws related to taxation, 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.
#2 – 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. Further financial accounting standards ensure control over accounting policies of business to protect the interest of investors.
#3 – 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.
#4 – Presentation of Historical Records
It focuses on the presentation of historical records and not on forecasting future, unlike other accounting. The primary rationale in preparation of Financial Accounts is the ascertainment of profit earned or loss incurred by the business in the period concerned.
#5 – Focus on External Transaction of Business
It focuses on a transaction which the business enters into with external parties, which can be customers, suppliers, etc. and based on these transactions, the accounts are prepared to quantify the business, costs incurred as expenses, and resultant profit or loss earned.
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#6 – Periodic Reporting and Wide Availability
Financial Accounting is undertaken with a pre-specified periodic reporting period, which is usually quarterly, half-yearly, and annually. It enables easy comparison and also keeps the information relevant and informative for various stakeholders. Further Financial Accounts are available publicly and are accessible to everyone who wants to know about the business and its performance.
#7 – Basis for Other Accounting
The other types of accounting, namely cost accounting or management accounting, provides its base data from financial accounting. As such, it acts as a source for different types of accounting undertaken by the business. It deals with business transactions broadly, which acts as a base for Cost Accounting to break further to identify costs with products and services.
#8 – Meeting the Objective of Various Stakeholders
- Another essential objective is meeting the needs of various stakeholders, which are associated with the business. Different stakeholders have different purposes, such as lenders to the business intends to assess the capability of the business to pay interest and principal, which is lent to the business or prospective lenders, so they are more interested in the solvency of the business and focus on that aspect.
- Similarly, customers are interested in knowing the growth and stability of the business and focus more on cash flow statements and financial statements to determine the ability of the business to provide better business terms and a consistent supply of goods and services.
#9 – Only Financial Transactions
Financial Accounting records only those transactions which can be denominated in monetary terms or those which include financial aspects as such non-financial transactions are outside its purview, and it serves the objective of only Financial Transactions
#10 – Reliability and Relevance
An important objective is to prepare such financial statements that are reliable, and decisions can be based on it. 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.
#11 – 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. In short, efforts must be made to prepare Financial Accounts in an easy way to know wherever possible.
Financial Accounting serves many objectives and involves recording, proper classification, and summarization of financial transaction and events that a business undergo to provide relevant and meaningful insights to various users.
It involves a four-step objective cycle, which is depicted below and is a critical Accounting branch.
- Step 1: Identifying the Financial Transaction that needs to be recorded. Non-financial transactions are not recorded.
- Step 2: Once a transaction is to be recorded, it should be clubbed in groups with similar characteristics /nature, which involve interpreting the transaction and making a correct journal entry.
- Step 3: Once transactions are recorded and clubbed together, they need to be summarized, which enables various intended users to understand and interpret the results of the business.
- Step 4: Finally providing the answer to users of such Financial Statements the profit or loss made by the business (Profit and Loss Account) and the resources on a particular date deployed to make such profits (Balance Sheet).
This article has been a guide to What is Objectives of Financial Accounting and its Definition. Here we discuss the top 11 objectives along with detailed explanations. You can learn more about from the following articles –