Financial Accounting And Its Purpose

Answer :


Financial accounting is an organised course of action including activities such as recording of accounting transaction, classification, verification, interpreting, summarizing and communicating or reporting of financial information. Financial accounting provides details and information regarding availability of existing or potential resources, way of financing and output through their utilisation. Financial accounting also provides groundwork for Internal and external stakeholders in order to take significant decisions (Agasisti and Catalano, 2013). All activities and functions of financial accounting are governed or administrated by some rules and guidelines called as financial accounting principles such as UK GAAP (Generally Accepted Accounting Principles). This report provides an explanation about definition of financial accounting, purpose of financial accounting, internal and external stakeholders and brief knowledge about accounting concepts, purpose of providing depreciation and major methods of depreciation, control accounts and purpose of bank reconciliation statements.


1.Financial Accounting and its purpose:

Financial accounting refers to a systematic process classification of financial and non financial transactions, recording of transaction, summarizing them for a better interpretation and reporting under a formal format to internal and external stakeholders. Financial accounting processes are structured in a systematic way and ensures compliances of various accounting principles, policies, rules and regulations (Alver, Alver and Talpas, 2013). Financial accounting gives a structure for quick assessment of any problems and for taking vital decisions. Following are the most considerable purpose of financial accounting, as follows:                                                                       

  • Financial reporting helps to record all financial transactions as per double entry system in an organised manner.
  • It helps to asses the actual position and performance of business organisation.
  • It assists in projecting anticipated earnings and performance of business organisation.
  • Financial reporting provide a basis for better decision making to investors and other stakeholders actual profitability and liquidity situation of business organisation as on a particular date.
  • It ensures compliance of statuary requirements, policies, framework, rules and regulations.
  • It provides a comparative data and records along with previous years data and competitor’s data and record to evaluate the performance effectively.
  • It serve as a formal report of financial health of business organisation to top management and external users of financial information (Barth, 2015).
  • It helps to classify organisation's various assets and liabilities in order to manage them efficiently.

2. Internal and external stakeholder:

Stakeholders are person, individual, group, body of individuals or  organisation having direct or indirect interest in organisation's position, performance, objectives or goals and results. Stakeholder are classified as internal stakeholders and external stakeholders. Internal stakeholders are person, group or individuals within the business organisation having substantial interest. Whereas external stakeholders are individuals, persons, group or organisation outside the business organisation associated with organisation and having direct or indirect interest (Edwards, 2013).

Internal Stakeholder: In a large business organisation internal stakeholders are shareholders, owners, management and employees (Stice and Stice, 2013). Following is a brief discussion about major internal stakeholders and, possible way through which they are interested in financial information of organisation, as follows:

  • Owners and shareholders:They are real stakeholders of entity. Owner and shareholders are holding major shares of a large business organisation and gain profits in case of increase in share price. They are having substantiate stake in organisation in form of profits and dividends. They are highly affected by the performance and financial position of company.  
  • Employees:Employees are most considerable resources of a business organisation and always wants to achieve growth within the organisation. Employees are having sustainable stake in business organisation because their salary and career are dependent on performance and growth of organisation.

External Stakeholder: External stakeholders in case of a large business organisation are its customers. Suppliers, government, creditors etc. Following is a short explanation about key external stakeholders and, manner through which they are interested in financial information of organisation, as follows:

Government: Government collect various taxes on income of business organisation so government hold stake in profits of entities in form of taxes. Government along with collection of taxes insures proper compliance of rules and regulation in business organisation.

Suppliers: Suppliers of goods and raw material receives payments from business organisation and full-fills the demands. They always tries to receive payment in scheduled times and provides credit based on liquidity position of company so suppliers having stake in business organisation in form of their payments and sales (DRURY, 2013).

Customers: Customers decides an organisation's growth and revenue. They contribute in business by purchasing and by recommending product of company to others. Customers buy product or services of organisation by analysing their popularity, quality, performance, growth and beliefs therefore they are holding stake in form of performance and sustainability of business organisation.

Investors: Investors are most significant for business organisation because they contribute in expansion and growth of company by investing their money or other financial assets in company. They are highly affected by performance and growth of business organisation. Investors are actual stakeholder of company because they always tries to get maximum return from investment made by in business organisation.


1. Journal Entries and Ledgers in the book of Alexandra Study:







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