Objectives of Financial Accounting

Updated on January 3, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

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 and external, which are connected to the business.

Key Takeaways

  1. Financial accounting’s main goal is to disclose the company’s profits and losses and to present a genuine and fair picture of the company to protect the interests of all internal and external stakeholders that have a stake in the company.
  2. Financial accounting objectives vary in nature, from compliance with statutory requirements, focus on externalities of a business, stakeholder objectives to be met, etc.
  3.  A predetermined periodic reporting period, typically quarterly, half-yearly, and annually, is used when performing financial accounting. It makes comparisons simple and maintains the information’s relevance and educational value for different stakeholders.
  4. One of the prime aspects of accounting, financial reporting’s main goal of creating financial accounts, is to determine whether a business made a profit or suffered a loss during the relevant time.

Objectives of Financial Accounting

#1 – 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.

Financial Accounting Video Explanation

 

#2 – Safeguarding of Interest of Various Stakeholders

It provides suitable and relevant information related to business operationsBusiness OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation.read more to stakeholders such as Shareholders, Prospective Investors, Financers, customers, and creditors. They are not just appropriate for those who have 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. In addition, further financial accounting standards ensure control over accounting policiesAccounting PoliciesAccounting policies refer to the framework or procedure followed by the management for bookkeeping and preparation of the financial statements. It involves accounting methods and practices determined at the corporate level.read more of businesses to protect the interest of investors.

#3 – Helps in the Measurement of Profit and Loss of Business

It measures the business’s profitability 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.

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#4 – Presentation of Historical Records

Unlike other accounting, it focuses on the presentation of historical records and not on forecasting the future. Therefore, the primary rationale for preparing Financial AccountsFinancial AccountsFinancial accounting refers to bookkeeping, i.e., identifying, classifying, summarizing and recording all the financial transactions in the Income Statement, Balance Sheet and Cash Flow Statement. It even includes the analysis of these financial statements.read more is ascertaining profit earned or loss incurred by the business in the period concerned.

#5 – Focus on External Transaction of Business

It focuses on a transaction that the business enters into with external parties, such as customers, suppliers, etc. The accounts are prepared to quantify the business, costs incurred as expenses, and resultant profit or loss earned based on these transactions.

#6 – Periodic Reporting and Wide Availability

Financial Accounting is undertaken with a pre-specified periodic reporting period, usually quarterly, half-yearly, and annually. It enables easy comparison and 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 accountingCost AccountingCost accounting is a defined stream of managerial accounting used for ascertaining the overall cost of production. It measures, records and analyzes both fixed and variable costs for this purpose.read more or management accounting, provides their base data from financial accounting. 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 further identify costs with products and services.

#8 – Meeting the Objective of Various Stakeholders

#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. Accordingly, it serves the objective of only Financial Transactions.

#10 – Reliability and Relevance

An important objective is to prepare reliable financial statements, 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, 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 so 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.
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Conclusion

Financial Accounting serves many objectives and involves recording, proper classification, and summarization of financial transactions and events that a business undergoes to provide relevant and meaningful insights to various users.

It involves a four-step objective cycle, depicted below, and is a critical Accounting branch.

Frequently Asked Questions (FAQs)

What does financial accounting do?

Financial accounting is known as the process of recording, compiling, and reporting the numerous transactions occurring from corporate operations throughout time. It is a particular branch of accounting. This accounting stream’s main goal is to depict a company’s overall performance appropriately. Additionally, this information is vital information for other parties.

Is financial accounting hard?

Financial accounting can be challenging or simple, depending on a person’s interests. Accounting isn’t always simple; there are instances when it calls for sifting through data, putting puzzle pieces together, and locating obscure financial information, particularly when conducting an audit or handling intricate tax computations.

What steps make up the financial accounting process?

Accounting is a set of procedures business entities use to record their financial transactions. These procedures involve: 
Gathering; 
Identifying; 
Categorizing; 
Summarizing, and 
Documenting those transactions in the company’s books of accounts.

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