What is Financial Accounting?
Financial accounting is the production and reporting of general purpose financial reports for external users to make decisions and evaluate the financial health of a company.
In other words, anything an accountant produces that is to be viewed by someone outside the business is known as financial accounting.
General Purpose Financial Reports
General-purpose financial reports are financial reports used by external users that inform on the past financial performance, position and other activities of a company. General-purpose financial reports could include:
- Statement of Financial Position (Balance Sheet)
- Statement of Comprehensive Income (Income Statement)
- Statement of Cash Flows
They are called general purpose financial reports as they do not serve a specific purpose and provide an overview of the company's financial as a whole for a certain period.
External users are people who rely on general-purpose financial reports to make financial decisions and to evaluate the financial health of the company. External users could include:
- Investors: used to decide whether to hold, sell or accumulate shares in a company
- Financial Institutions: used to determine a company's accessibility to a loan
- Government: The Australian Tax Office (ATO) could use financial information to determine the appropriate level of tax to be paid by the company.
- Creditors: used to determine the level of risk of the company
General-purpose financial reports are required to be produced on a periodic basis. Most public companies by law, are required to produce general purpose financial reports once a year but those listed on the ASX are often subject to even tighter regulation with the production of quarterly and half-yearly reports as well as the annual report.
Rules and Regulations
The production of general-purpose financial reports is subject to strict rules and regulations. The production of these reports must confine by:
- AASB Standards
- Accounting Conceptual Framework
- Corporations Act 2001
- ASX Listing Rules (if listed on the ASX)
The heavy regulation ensures that external users are not misled and that the financial reports represent a true and fair view of the financial health of a company. Most reporting entities are required to have their general purpose financial reports to be checked by an independent accountant known as an external auditor.