The overriding purpose of financial accounting is to summarize financial activity in your business in the profit and loss statement, balance sheet and cash flow statement. Accounting records and bookkeeping are the basis of your business’s financial accounting. Where systems and processes are of sound nature and contain adequate controls, the reliability of your business’s financial accounts increases.

Role of Financial Accounting

In a business, the financial accounting function is responsible for periodically reporting pecuniary information to business owners. Interested parties such as regulators, customers, investors and creditors often require this financial information. If banks refuse to rely on your accounting records, you will have trouble securing loans for your business. Financial accounting dictates the amounts you owe to suppliers, what customers owe you, operating costs, payroll costs and available cash. You can use financial accounting to analyze significant aspects of your business, such as monthly sales or the reasons for high expenses in one month.

System of Control

Financial accounting forms a basic set of financial controls for your business. This requires that you have adequate knowledge and understanding of financial accounting principles and conventions so you can assign responsibilities, record financial information and divide duties among employees. Financial accounting, therefore, enables you to monitor such duties and their results more closely. Sound financial records demonstrate financial controls and oversight that reduce the risk of fraud and theft, something that investors like to see.

Company Analysis

Financial accounting can produce financial information in a manner that makes interpreting business performance easy. As a business owner, you can use financial accounting to develop ratio analyses and use those ratios to perform more detailed analysis of various aspects of your business. You can measure your business’s cash position or measure your profit or sales ratio and compare it with your past performance or the performance of competitors. Financial accounting helps you formulate your future course of action or strategy and measure the success of this strategy with the financial information produced from another period.

Basis

To be a meaningful, value-added function, your company's financial accounting must follow certain conventions. It must be relevant, which means the information affects stakeholder decisions. It must present objective information that can be measured and expressed by accepted standards. Financial accounting must be feasible, so the cost of presenting this information should not exceed its benefit. The information that you present must be consistent, and you must meticulously follow the same accounting principles for all records.