Financial accounting is one of the branches of accounting that is used to keep a track of financial transactions of an organization. There are some standardized guidelines that are to be followed here financial accounting: reporting, analysis and decision making is done in a systematic way and is presented through financial statements such as balance sheet and income statement.
Organizations whether big or small use these financial statements on a routine basis to show their financial performance and position. These statements are external in nature so that the financial position of the company is in front of everyone especially in regards to the lenders and investors who are looking forward to give you loans or want to invest in your company respectively.
One must understand that the purpose of financial accounting and financial statement is not to value the company but it is done in order to provide information to everyone for analyzing and assessing the value of the organization for themselves. Financial accounting is commonly used by a lot of organizations in a variety of ways which is why there are some common rules that are to be followed by everyone. These rules are known as generally accepted accounting principles (GAAP) and accounting standards.
This process is where the transactions undertaken by the organization is collected, measured, recorded and then reported in the form of financial statements. To understand the business activities that have been happening throughout the year is important which can later be analyzed by the concerned people in decision making, building strategies, facilitate efficient resource allocation.
If the information is not provided to the world, it would be difficult for the shareholders, creditors and investors to decide where should they invest and if they would get any profitable margins from those organizations or not.
Different between Financial and Managerial Accounting
The major difference between the managerial and financial accounting is of the audience. Financial accounting is more relevant to the outside world whereas, managerial accounting pertains to the management of the organization. Managerial accounting takes into account the short term and the quick decisions that need to be taken by the organization whereas, financial accounting is of a broader scope and deals with building strategies, taking decisions and deciding whether a shareholder should invest or if there are lending or financing requirements required or not. Managerial accounting tends to look at functions other than income statement, balance sheet and cash flows and depends mainly on the manager of the organization as to what they want to achieve. An example for the same could be that a manager may be concerned about dollar amounts through sales, a production manager may be concerned about the volume that is required to meet the demand and so on. Visit this website to find out more details.