Wednesday, June 2, 2021

Why Financial Accounting is Important for a Business?

Financial accounting is a specific branch of accounting concerned with recording, summarizing, and reporting a company's business transactions through financial statements. Let's see what is the importance of financial accounting for the success of any company?

Importance of Financial Accounting
Importance of Financial Accounting

What Are the Benefits of Financial Accounting for a Company?

Financial accounting plays a key role in the success of any business. It allows companies to record and track all their financial statements and understand the company's health and it helps internal and external stakeholders make better business decisions.

Let's introduce you to financial accounting and its objective, then we will discuss the benefits and importance of financial accounting for a business.


What is Financial Accounting?

Financial accounting is a set of processes that include recording, summarizing, and reporting a company's financial transactions that result from business operations during a specific period of time.

Financial accounting is concerned with applying a system to monitor the financial activities and position of a business, person, or other entity.

All financial accounting processes are summarized by relying on the preparation of financial statements. 

Financial statements are formal records of the business activities and the financial performance of a company.

There are 4 main financial statements, including: (1) cash flow statements, (2) balance sheet statements, (3) income statements, and (4) statements of shareholders' equity.

These statements help to clarify the operating performance of the firm during a specific period of time.


There are several categories of individuals or organizations who benefit from financial accounting information, and this depends on the diversity of the parties associated with the company, whether by relying on direct or indirect contact. 

Businesses use financial documents to present revenues, expenses, assets, liabilities and equity and drive growth opportunities and success.


 What Are the Objectives of Financial Accounting?

Financial accounting seeks to achieve many goals in all types of companies, but its main objective is to contribute to the provision of accounting and financial information to its beneficiaries, whether inside or outside the company.

Financial accounting depends on the financial statements, as they are the main and reliable source of information about business activities and the financial performance of a company and the financial statements seek to achieve a set of goals, including:

  • Preparing an organization's financial accounts for a specific period.
  • Ascertaining financial affairs such as debts-liabilities, property, and assets, etc.
  • Providing information that supports the company's capabilities in evaluating cash flows.
  • Regularly applying the measurement of private income in the company.
  • Tracking and analyzing business performance and the financial health of the business.
  • Preventing money defalcation through fraud and forgery and controlling the cost of concern.
  • Providing information about the sources of the economic resources of the company.
  • Providing the concerned parties with all economic data to prepare financial statements and reports etc. in time.
  • Creating higher values among individuals and organizations and ensuring transparency and accountability.
  • Determining and evaluating the management policies in running the business successfully.


What is The Importance of Financial Accounting?

Financial accounting is one of the most important branches of accounting in general. It provides a lot of information that is very important to the work environment and helps companies to record and track all their financial data and understand the company's health and take decisions accordingly.

The importance of financial accounting can be summarized according to the following points:


Recording financial transactions: The main function of financial accounting is to write and record financial transactions, and this function is called bookkeeping in accounting language.

Small business owners rely on financial accounting in order to record all business activities that occur within their companies in the accounting ledger.

Financial accounting depends on the use of double entries in recording all financial transactions. Therefore, every accounting process has two sides, one of which is a creditor and the other is a debitor.

Financial accounting is important for business owners because it provides them with systematic insights that help to provide a description of their work and take necessary decisions.


Comparing and analyzing financial data: Comparison and analysis are two means that help owners of commercial companies to benefit from financial accounting information in order to analyze and study competitors and investment opportunities.

Financial accounting is governed by the general principles of accounting. Therefore, a similarity appears in the method of preparing financial data and information for various companies, and this accounting helps to calculate the financial ratios based on the company's own data, and then compare it with competing companies or standard ratios.


Communicating information to internal parties: The purpose of financial accounting is to take care of internal users and constitute the financial department and all individuals whose tasks depend on the distribution of profits according to shares.

It is possible for company owners to use this financial information in order to identify the weaknesses and strengths of employees, and this information also contributes to supporting the productivity of employees by providing rewards to them.


Communicating information to external parties: Financial accounting helps the owners of commercial companies to communicate accounting information to external parties, and this includes both individuals and other firms that deal financially with these companies but they do not form part of their businesses, and they are also called external users of financial data and information.

These financial statements represent the final results of the financial accounting operations. Examples are suppliers and banks.


Conclusion: 

Since its emergence, financial accounting has been influenced by a number of factors that have contributed to its development, and these factors have also evolved over time.

Many organizations have shown interest in the development of financial accounting, which has contributed to the release of numerous researches and studies and the formation of the theoretical framework for the development of financial accounting.

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