Home Corporate Finance Guide to Financial Accounting

Guide to Financial Accounting

Guide to Financial Accounting

What is Financial Accounting?

Financial accounting is the specific field of accountancy that is solely concerned with the preparation of financial statements, such as components of the prospectus and balance sheet. When finalized, these financial statements are delivered to various decision makers connected with the company, including, stockholders, suppliers, banks, employees, government agencies, stakeholders and owners.

Variable of financial accounting are measured in unites of constant purchasing power or monetary units. Both units of financial accounting are delivered to reduce the principal-agent problem. 

What is the Principal-Agent Problem?

The principal-agent problem is a common situation tied-into economics and political science, which treats the difficulties that arise under conditions of incomplete and asymmetric information when a principal (any legal or natural individual who authorizes an agent to create one or more legal relationships with a third party) hires an agent. These problems can revolve around the institution of moral hazard or the presence of a conflict of interest.

In summation, the principal-agent problem arises when the agent’s interests do not match or align with the principal’s. Financial accounting aims to mitigate this situation by measuring and monitory the agent’s performance and subsequently reporting the results to all interested users. 

Financial accounting is also applied to prepare accounting information for outside entities or those not involved in the day-to-day running of a company. Furthermore, the subject offers management accounting practice to provide accounting information to managers to elucidate and subsequently make sound decisions to manage the business.

Financial accounting, in short, is the summarizing of financial data taken from an entity’s accounting files and then subsequently, publishing those records in annual or quarterly reports. These reports are then used by entity’s outside the organization’s business model to evaluate the health of the company. Financial accounting is governed by both local and international accounting standards. 

Basic Financial Accounting Concepts:

A financial accountant will produce financial statements based on the generally accepted accounting principles of a respective nation. In more exacting situations, financial statements are required based on the International Financial Reporting Standards. In general, financial accounting serves the following purposes:
• Financial accounting produces general purpose financial statements
• Financial accounting delivers information that is used by management in their planning, decision making and performance evaluations.