Financial accounting is a systematic process designed to record, classify, summarize, and communicate financial transactions of a Bookkeeping Services in Knoxville. Its objectives and scope are focused primarily on providing useful financial information to external stakeholders to aid their economic decision-making.
Method: This is achieved through the preparation of the Income Statement (or Profit and Loss Account), which systematically matches revenues earned against expenses incurred to arrive at a Net Income (Profit) or Net Loss.
Method: This is achieved through the Balance Sheet, which quantifies the company's Assets (what it owns), Liabilities (what it owes), and Shareholders' Equity (the owners' claim).
Method: This is presented in the Statement of Cash Flows, which categorizes cash movements into three areas: Operating, Investing, and Financing activities. This provides insight into the company's liquidity and solvency.
For Investors: Information helps them assess returns and risk to decide whether to buy, sell, or hold the company's stock.
For Creditors/Lenders: Information helps them assess the company's ability to service its debt and repay loans (creditworthiness).
In essence, the scope begins with a single monetary transaction and ends with the Bookkeeping Services Knoxville of the consolidated, audited financial statements.
Primary Objectives of Financial Accounting
The core aim of financial accounting is to create a reliable and transparent financial narrative of the business for outside parties. The main objectives are:1. Ascertaining Profitability and Performance
The most immediate objective is to determine the operating success or failure of the business over a specific period (e.g., a quarter or a year).Method: This is achieved through the preparation of the Income Statement (or Profit and Loss Account), which systematically matches revenues earned against expenses incurred to arrive at a Net Income (Profit) or Net Loss.
2. Determining Financial Position
This objective is to present a snapshot of the company's financial health at a specific point in time.Method: This is achieved through the Balance Sheet, which quantifies the company's Assets (what it owns), Liabilities (what it owes), and Shareholders' Equity (the owners' claim).
3. Tracking Cash Flow
A crucial objective is to show how a company generates and uses its cash.Method: This is presented in the Statement of Cash Flows, which categorizes cash movements into three areas: Operating, Investing, and Financing activities. This provides insight into the company's liquidity and solvency.
4. Providing Information for Decision Making
The overarching goal is to equip external users with data to make informed economic decisions.For Investors: Information helps them assess returns and risk to decide whether to buy, sell, or hold the company's stock.
For Creditors/Lenders: Information helps them assess the company's ability to service its debt and repay loans (creditworthiness).
5. Ensuring Transparency and Accountability (Stewardship)
Financial accounting holds management accountable for the proper and efficient use of the company's resources entrusted to them by the owners (shareholders). It mandates that financial records be transparent and verifiable.6. Meeting Legal and Regulatory Compliance
All publicly listed companies and most large private firms are required by law to prepare financial statements in accordance with established standards, such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).In essence, the scope begins with a single monetary transaction and ends with the Bookkeeping Services Knoxville of the consolidated, audited financial statements.