The main purpose of financial accounting is:

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.

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.

#2 – Safeguarding of Interest of Various Stakeholders

It provides suitable and relevant information related to business 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 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.

#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 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 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

• 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 intend 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 businessSolvency of a company means its ability to meet the long term financial commitments, continue its operation in the foreseeable future and achieve long term growth. It indicates that the entity will conduct its business with ease.read more and focus on that aspect.
• Similarly, customers are interested in knowing the growth and stability of the business and focus more on cash flow statementsA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business.read more and financial statementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more 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. 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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Source: Objectives of Financial Accounting (wallstreetmojo.com)

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.

• 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, enabling various intended users to understand and interpret the business results.
• Step 4: Finally, provide the answer to users of such Financial Statements regarding the profit or loss made by the business (Profit and Loss AccountThe Profit & Loss account, also known as the Income statement, is a financial statement that summarizes an organization's revenue and costs incurred during the financial period and is indicative of the company's financial performance by showing whether the company made a profit or incurred losses during that period.read more) and the resources on a particular date deployed to make such profits (Balance Sheet).

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