An important purpose of financial accounting is to summarize the financial performance of your business in financial statements. When systems and processes are reasonable in nature and contain appropriate controls, the reliability of your business' financial information increases.
Financial accounting is defined as the collection, processing, examination, analysis and provision of economic and financial information by means of financial statements to subjects who have information needs. Financial statements summarize the financial performance of your business in profit and loss statements, balance sheets, and cash flow statements.
The main roles and functions of financial accounting in business
1. Financial management role
In a business, the financial accounting function is responsible for periodically reporting “monetary” information to the business owner. Interested parties such as regulators, customers, investors, and creditors often request this financial information. If banks refuse to rely on your accounting records, you will have a hard time securing loans for your business. Financial accounting determines how much you owe to suppliers, what customers owe you, operating expenses, payroll costs, and available cash.
You can use financial accounting to analyze important aspects of your business, such as monthly revenue or the reason for high expenses in a month.
2. As control system
Financial accounting forms a foundation of financial control for your business. This requires you to have adequate knowledge and understanding of financial accounting principles and conventions so that you can assign responsibilities, record financial information, and divide duties among employees. pellets. As a result, financial accounting allows you to monitor those tasks and their results more closely.
Sound financial records demonstrate financial controls and supervision that reduce the risk of fraud, which investors want to see.
3. Business analysis
Financial accounting can generate financial information in a way that makes it easy to interpret business performance. As a business owner, you can use financial accounting to develop ratio analyzes and use those ratios to perform more detailed analysis of different aspects of your business. You can measure your business's cash position or measure your profit or sales ratio and compare it to your previous performance or the performance of your competitors.
Financial accounting helps you to form a future course of action or strategy and measure the success of this strategy with financial information generated from another period.