Table of Contents
What is financial accounting?
The financial accounting conform all procedures that collect, classify, record and account for all financial operations of the company.
The accounting reports allow you to make decisions about your business, hence the importance of preparing them with objective and real information. In addition, they are also a tool for potential investors to know the situation of the company.
This branch of accounting is considered as an information system that seeks to measure the evolution of the assets of companies.
It covers a systematic or procedural record of the transactions carried out in the economic (asset management) and financial (debt and equity administration) transactions.
The result of financial accounting is the obtaining of the annual or periodic accounts, classified and presented in the financial statements with attention to the International Financial Reporting Standards and other accounting principles and procedures whose standardization allows the comparison, interpretation and analysis of it in support of decision making.
Hence the importance for managers, managers and business owners, large or small. The correct interpretation and analysis of the information provided by financial accounting give rise to the taking of transcendental decisions for the company in favour of its sustainability and growth.
In Short following are the advantages:
Advantages of financial accounting
- Have information about the results of economic operations.
- Know the financial position and cash flows.
- Identify what the organization’s assets are
- Report timely the situation of the company.
- Render accounts to third parties.
- Monitor expenses and income corresponding to each period that is evaluated.
In Short following are the disadvantages:
Disadvantages of financial accounting
- Subject to fraud
- No discussion of non-financial issues
- Not verified
- No predictive value
- Dependence on historical costs
- Inflationary effects
- Intangible assets not recorded
- Based on specific time period
- Not always comparable across companies
Advantages of financial accounting
Managers appreciate financial accounting because it can be adapted, adjusted and implemented according to the changing needs of the company. Unlike static financial accounting, based on the Financial Accounting Standards Board (FASB), cost accounting only needs to worry about internal vision and internal purposes.
Labor costs are easier to monitor and control through financial accounting. Depending on the nature of the business, salary expenses can be taken from orders, jobs, contracts or departments and subdepartments. This means that management can choose and choose how it determines efficiency and productivity. This is very important when estimating the marginal productivity of individual employees.
Financial accounting can be considered as a kind of three-dimensional puzzle. Accounts, calculations and reports can be manipulated and viewed from different angles. Management can analyze the information according to the criteria it values, which guides how prices are established, resources are distributed, capital is increased and risks are assumed. It is a crucial element in the discussion and analysis of the administration.
Disadvantages of Financial accounting
The benefits of financial accounting are priced. Since the cost calculation methods differ from one organization to another, it is not clear how these costs could manifest until a specific company is examined.
Generally speaking, complex cost accounting systems require a lot of work at the front, and constant adjustments must be made for improvements.
This complexity consumes time and resources and leaves room for misinterpretation.
Even if the rigidity of financial accounting creates some inherent disadvantages, it eliminates uncertainty and incorrect application of accounting guidelines for cost accounting. Uncertainty is equal to risk, which always has a cost. This means additional, and often more vigorous, reconciliation to verify accuracy.
The most qualified accountants and auditors are likely to charge more for their services. Employees must receive additional training and must cooperate sufficiently with data entry; the lack of cooperation can make an otherwise beautifully constructed system ineffective.
Repeated compensation in any accounting method is accuracy versus convenience. Cost accounting reflects this more dramatically than other accounting methods due to its flexibility. Each company needs to find its own balance between the two.
Cost calculation methods are generally not useful for calculating tax liabilities, which means that cost accounting cannot provide a complete analysis of the true costs of a company. It is quite easy to compensate for this by combining financial accounting with cost accounting, but, nevertheless, it highlights an error in cost accounting.
Characteristics and scope of Financial Accounting
Various authors, colleges and federations of accounting work coincide in the following characteristics and scope of financial accounting :
- Summarizes and presents the financial movement of the company in the form of the balance sheet, income statement, equity movement and cash flow.
- In compliance with international standards, it covers business operations in a systematic, historical and chronological manner.
- It is vital in every business, from the smallest of the ventures to the largest corporation.
- It informs in a timely manner the economic and financial position of the company.
- It represents the common language of the business.
- It is a mandatory and legal imposition.
- It sufficiently reveals the information of the company, based on bookkeeping and the double-entry principle.
Advantages and disadvantages of Financial Accounting:
Access to information
Along with the most significant advantages of financial accounting is the information that is revealed about our business.
This information is useful not only for managers or owners who use data on assets, debts, income, costs, expenses and results to make decisions for the future, but also is input an object of analysis of potential investors and creditors. Interest groups that examine the results of financial accounting, that is, the financial statements, to decide whether or not to finance the business.
This area of accounting allows business leaders to alter their budgets and plans for the future to focus on solving new financial problems or to take advantage of the financial strengths that are revealed and thus grow or gain competitiveness within the sector where the company develops.
If the information provided by financial accounting faithfully represents the situation of the company, the managers will act in an ideal manner and that efficiency and productivity will result in the business results, which is warned in turn by potential investors, creditors, customers and the market in general.
Compliance with laws and regulations
The governmental regulations of any country require that the businesses carry out the financial accounting , under national and international standards.
This means that the process has the additional advantage of maintaining a formal and solvent business with the regulatory and inspection agencies, freeing them from fines or disciplinary actions.
The information of financial accounting is an element of transparency and ethics of the operations of the company, which requires an honest, accurate treatment, under strict registration and recognition principles. Generating data that managers, managers, suppliers, customers, investors, banking and market analysts can review.
Businesses also need financial accounting information, such as after-tax benefits and the value of tax-deductible expenses, to foresee, anticipate, enter and record their annual reimbursements and taxes.
Investment of time and costs
As a disadvantage, financial accounting is partly expensive to implement, especially for the larger ones. Requires the hiring and implementation of accounting software.
For a small business, the owners need to dedicate time for accounting if not directly, in supervision and information input, which uses the time that could be spent on managing employees, managing products and services or promoting business.
Large businesses employ qualified accounting departments, qualified specialists in universities, duly collegiate, and a support team to carry out their work.
Operational and registration inconveniences
Another factor against financial accounting is the interruption or interference in the daily development of operations, as well as the opportune moment to make the recognition and registration of transactions.
Which is quite an inconvenience when a business chooses an inadequate type of internal accounting system for its activities or fails to update its accounting methods to keep pace with its growth.
For example, cash accounting methods only recognize transactions once they are completed, which works well for small businesses, but could distort the portfolio of outstanding payments and accounts receivable that a large business has.