The objectives of financial accounting and the scope of financial accounting are to offer relevant, reliable, and well-timed facts about an employer’s overall financial performance and role. Financial accounting seeks to speak this information to various stakeholders, including buyers, lenders, authorities, organizations, and the general public.
Top Objectives of Financial Accounting
Objectives of financial accounting have been summarized in the following points:
1. To Keep Systematic Records
During business conduct, several financial transactions occur as it is impossible to memorize them. There is a need to record all transactions. Maintaining a proper and systematic record of all business transactions is the main objective of financial accounting.
2. To Determine Profit and Loss
Preparing a Profit and Loss Account or Income and Expenditure Statement by a business entity helps achieve the next objective of Financial Accounting. i.e., to determine the profit earned or loss incurred during an accounting year.
3. To Ascertain the Financial Position
One of the most important objectives of financial accounting is to enable the management of a business entity to ascertain the financial position of the business, i.e., where the business stands, what is owned by it, and what it owes. A balance sheet is prepared at the end of a financial year to achieve this objective. The balance sheet depicts the statement of assets and liabilities of a business entity as of a particular date.
4. To Communicate the Information
Financial Accounting is helpful to the management of a company, majorly in the decision-making process, by providing financial data and other vital information/facts to different stakeholders, viz, owners, creditors, employees, investors, regulators, tax/other government authorities, etc. Thus, communicating financial accounting information is equally important as other objectives of Financial Accounting.
Major Scope of Financial Accounting
The scope of financial accounting is wide-ranging and is evident from the following:
1. Business Forecasting
A business entity is interested in ascertaining its future level based on past and present business activities. Such forecasting enables it to chalk out strategies (like expansion, diversification, etc.) in advance, relating to plans about the level of existing activities. For example, if a manufacturing unit engaged in the manufacturing of sports Shoes wants to go ahead with the expansion and diversification of its activities into manufacturing formal shoes. In that case, accounting may be extremely helpful for making appropriate forecasting decisions. This big scope of financial accounting is very important for users.
2. Proper Decision-Making
A company is frequently required to make important decisions regarding:
- Fixing the price of finished goods based on their cost
- Investment level in new projects
- Increase in salary and wages of its employees/laborers
- Distribution of dividends/bonus, etc.
3. Correct Taxation
A company has to fulfil its obligations regarding liabilities on account of various government taxes, e.g., service tax, income tax, sales tax, excise duty, customs, etc. The amount of such taxes is decided based on financial results reflected through financial records. An appropriate accounting system prevailing in the company facilitates the determination of precise amounts for each tax category.
4. Replacing Memory
A business entity enters into several financial transactions, which are complex and diversified. No business entity can memorize every single transaction. As each transaction is recorded in writing through the accounting System, memorizing every transaction is not required.
5. Analyzing the Performance of the Business
Maintaining a proper record of every business transaction through accounting enables one to ascertain a company’s performance in terms of income, expenditure, profitability, etc., in detail. Various sub-head items can also be analyzed, and necessary steps may be taken to improve a company’s performance.
Conclusion
In this article, we have explained the objectives of financial accounting and the scope of financial accounting. Financial accounting works with other branches of accounting, including managerial accounting, value accounting, and tax accounting, to provide a complete view of an enterprise’s financial performance and help in choice-making methods.