Financial Accounting And Its Purpose


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Financial accounting is an organised course of action including activities such as recording accounting transactions, classification, verification, interpreting, summarizing and communicating or reporting financial information. Financial accounting provides details and information regarding the availability of existing or potential resources, ways of financing and output through their utilisation. Financial accounting also provides the 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 the definition of financial accounting, the purpose of financial accounting, internal and external stakeholders and brief knowledge about accounting concepts, the purpose of providing depreciation and major methods of depreciation, control accounts and the purpose of bank reconciliation statements.


1. Financial Accounting and its purpose:

Financial accounting refers to a systematic process of classification of financial and non-financial transactions, recording of transactions, 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 ensure compliance with 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 making vital decisions. Following are The most considerable purposes of financial accounting, as follows:

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

2. Internal and external stakeholders:

Stakeholders are persons, individuals, groups, bodies of individuals or organisations having a direct or indirect interest in the organisation's position, performance, objectives or goals and results. Stakeholders are classified as internal stakeholders and external stakeholders. Internal stakeholders are persons, groups or individuals within the business organisation having substantial interest. Whereas external stakeholders are individuals, persons, groups or organisations outside the business organisation associated with the 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, the possible way through which they are interested in the financial information of the organisation, a

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