Last updated on April 11th, 2024 at 12:49 am
In this article, we will discuss The Importance of Financial Accounting.
Accounting is a growing and steady job. Every company needs an accountant to handle the company’s account and transactions. Even now, after 2023, it is expected that the job opportunities in this field will grow up to 6-8% till 2030.
Accounts have several diverse fields in it, and one of the most important and central parts of Accounting is Financial Accounting. And before we learn about The Importance of Financial Accounting, lets understand what is Financial Accounting :
Financial Accounting
Financial Accounting can be defined as the process of recording, organizing, analyzing and finally reporting on the financial position of the business. All the data is collected and presented on the financial statement, and this process is done quarterly and yearly deepening on the company.
Financial Statements made are categorized into 4 types : Income Statement, cash flow statement , Statement of shareholder’s equity and balance sheet. This data is used by the board, equity holders, and all other stakeholders to understand the financial position of the business, take decisions regarding business and understand how well the business is running.
This is the main difference between Managerial accounting and Financial accounting. Financial accounting is more cornered with making reports to present it to external stakeholders. For these external stakeholders, Importance of Financial Accounting is important as it gives them clarity about the company and its success.
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Let’s jump onto learning about The Importance of Financial Accounting.
Importance of Financial Accounting
Financial accounting is the key for stakeholders and the company, it helps them make decisions regarding the company. All the functions carried out in financial accounting impacts the company in a drastic way. To understand The Importance of Financial Accounting in a business, lets study the points mentioned below :
Keeping Transaction Records
The most basic thing that explains the Importance of Financial Accounting is that it records the financial transactions, done on the spot or on credit. It helps the company to keep detailed records of every transaction done. This part is called accounting or bookkeeping.
The main benefit of these records are that they give you a clear idea on the expenses and earning of the company, which is an important part during audit.
Financial Positions
Financial Accounting produces financial statements – Income statement, cash flow statement, shareholder’s equity statement and balance sheet. These financial statements help the company to identify the financial position it is at.
Knowing about the company’s financial position enables the stakeholder to understand where the company stands against the competitors. Knowing the financial position of the company also helps to understand if the company grew or fell from its previously checked position.
Internal Stakeholders
Another set of people who hold and understand the Importance of Financial Accounting are the internal stakeholders of the company. The internal stakeholders include the Board of Directors and employees.
The first reason the internal stakeholders understand the Importance of Financial Accounting is because it helps the management to make decisions regarding future operations based on the financial statement.
In the case of employees, financial statements enable them to understand how well the company is doing. It helps them feel secure about their jobs when they are sure that the company is doing well and there won’t be downsizing.
Employees also get to know if they made big contributions and how likely they are about to get a bonus for their work, festivals, etc.
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External Stakeholders
As we’ve discussed earlier, Financial Accounting is of great importance to stakeholders of the company. These stakeholders are shareholders, suppliers, retailers, distributors and other stakeholders who are associated with the business.
Financial Accounting enables these stakeholder to get ahold of the financial position of the company. It is essential that stakeholders are aware about the financial position of a company as it helps them to make decisions regarding their relation with the company.
Every stakeholder wants to do business with a good and honest company, Financial accounting enables them to study the way the company has conducted their business in the past. This helps the stakeholder to decide whether to invest and do business with the company or not.
Suppose if the company shares are about to go up, the financial statement can help the investors to understand about the upcoming boom period of company shares, this benefits the investor as well as the company.
Tax Filing
Financial accounting is also helpful during filing taxes. The comprehensive record keeping technique of accounting is extremely helpful during filing taxes. It gives all the details of every transaction occurred during business exchange. It helps the company to stay afloat and stay safe from any legal issues.
Decision Making
Financial accounting enables the company’s management to understand the company’s financial position, which in turn helps the company to make decisions to improve on their operations.
Importance of Financial Accounting is understood by the company. When the company understands where they stand, they research and understand where they are lacking and work to improve their rankings against their competitors.
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FAQs
What is the most important in accounting?
Income statement/ Profit and Loss statement of the company is the most important part of accounting in business.
What are the two methods of financial accounting?
Cash Method and Accrual Method. These are the two methods in which the companies conduct their financial accounting work.
Closing statement
Financial Accounting is a crucial part of any organization. It helps the company and their stakeholders to understand the company’s position. It helps the management to make decisions to improve and stakeholders to make decisions regarding their investments and involvement.
Without it, the company would be at loss about what aspects they lack in, which transaction happened where, it can also prevent frauds in the company.
I hope this blog about the Importance of Financial Accounting was informative to you. If there are any doubts or recommendations, record and post it in the comment box
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