Financial accounting is the field of accounting that is concerned with the preparation of all the financial statements of the business. Every business aims to create the maximum value for their shareholders and for the business itself. It is best achieved when there is a method for the management and directors to monitor the business. Financial accounting provides some assistance in the monitoring by providing relevant, reliable and timely information to the shareholders.
All of the amounts that are used in financial accounting, is supported by various source documents such as invoices. All of these are processed by using GAAP (Generally Accepted Accounting Principles). All of the information is then reported through the financial statements.
Qualities of financial accounting:
- Relevance: It is decision specific.
- Materiality: The information is material if its omission or misstatement could influence the economic decisions that users make on a daily basis.
- Reliability: All of the information should be error-free and managers should be able to rely on it.
- Understandability: The accounting reports should be expressed as clearly as possible on order to be understood by those who need to access the information.
- Comparability: The financial reports from different periods should be comparable with each other in order to evaluate the the business’ financial situation and draw up the necessary conclusions from the information.
The differences between financial accounting and cost accounting:
- Financial accounting aims at calculating the results of the accounting year in the form of a Profit and Loss account and the Balance Sheet.
- Cost accounting aims to calculating the cost of production or service in a scientific manner and to facilitate cost control and cost reduction.
- Cost accounting is an internal reporting system for an organization’s management for their decision-making process.
- In financial accounting, the cost classification is based on the type of transaction that takes place such as salaries.
- In cost accounting, the classification of costs is generally on the basis of functions, activities, products, process and on the internal planing, control and information needs of the organization.