Financial Accounting: Concept | Management Optional Notes for UPSC PDF Download

Introduction

Accounting is often referred to as the language of business, and financial accounting is a crucial branch of accounting. Financial accounting involves recording, classifying, and summarizing financial transactions, as well as preparing statements in accordance with generally accepted accounting concepts and conventions. Its primary purpose is to assist external parties, such as shareholders and creditors, by providing information about the overall operational results of a business.

Concept of financial accounting

• Financial accounting is the process of providing information about a business or organization's financial performance and position. It helps executives and staff assess growth and predict future results. The main objectives are to determine business operation results (profit or loss) during a specific period and state the financial position (balance sheet) at the end of that period.
  The foundation of financial accounting lies in the accounting equation:
  Assets = Liabilities + Owners’ Equity
• Financial accounting is grounded in the accounting equation: Assets = Liabilities + Owners' Equity. This equation must always balance. Assets represent valuable resources owned by the firm, while liabilities are present obligations, and owners' equity signifies the owners' residual interest in the business.
• Management literature emphasizes that financial accounting involves rules and procedures to communicate financial information about an organization. Individuals with a high level of financial accounting knowledge can use this information to make crucial decisions regarding employment, lending, credit, and ownership shares.
• Financial accountancy adheres to both local and international accounting standards. Generally Accepted Accounting Principles (GAAP) serves as the standard framework for financial accounting guidelines in a given jurisdiction, encompassing standards, conventions, and rules. Additionally, International Financial Reporting Standards (IFRS) provides a set of international accounting standards for reporting specific transactions and events in financial statements.

Financial Accounting Process

The basic features of financial accounting include:

• Relevance: Financial accounting is decision-specific and should have the capacity to influence decisions. This is crucial for the development of financial statements.
• Materiality: Information is considered material if its error or misstatement could impact the economic decisions made by users relying on the financial statements.
• Reliability: Accounting information must be precise and unbiased, making it reliable and capable of being depended upon by managers. However, there may be a trade-off between relevance and reliability.
• Understandability: Accounting reports should be clear and comprehensible to both accountants and the intended audience of the information.
• Comparability: Financial reports from different periods should be comparable, allowing meaningful conclusions about trends in an entity's financial performance over time. This can be achieved by consistently applying the same accounting policies.