Definition and Scope of Financial Accounting

Definition: Financial accounting involves recording, summarizing, and reporting a company’s financial transactions over a specific period. The aim is to prepare financial statements like the income statement, balance sheet, and cash flow statement, which help stakeholders assess the company’s financial health.

Scope:

1. External Reporting:
   Financial accounting focuses on preparing reports for external stakeholders such as investors, creditors, and regulators, enabling them to make informed decisions.

2. Historical Data:
   It deals with past transactions, providing an accurate record of a company’s operations and financial position.

3. Preparation of Financial Statements:
   Financial statements are the core output, ensuring that companies comply with accounting standards like GAAP or IFRS.

4. Objective Reporting:
   Financial accounting presents unbiased, factual data based on verifiable evidence, avoiding subjective estimates.

5. Regulatory Compliance:
   Companies are legally required to prepare financial reports for tax authorities and regulatory bodies, making financial accounting essential for businesses.

Purpose:

• Provide clear financial data to stakeholders.
• Help in decision-making based on financial performance.
• Ensure accountability and transparency in business operations.