Financial accounting is one of the branches of accounting in which the company records all the financial transactions of the financial year and presents it in a systematic way to all the parties interested in the company. Financial accounting is the most basic and widely used concept all over the world, in order to understand this concept better let’s look at some of the features of financial accounting –
- The first and foremost feature of financial accounting is that in case of financial accounting only those transactions are recorded which involves money and hence it excludes non-monetary transactions. For example if company purchase $10 worth of stationary then it will be recorded in the books of accounts, however if the CEO of company dies then its impact is huge still in financial accounting there will be no record of death of CEO.
- Financial accounting preparation is compulsory for the companies and the companies have to make financial statements like profit and loss account, balance sheet etc….., every year unlike management accounting which is not mandatory.
- Financial accounting can be compared to postmortem because in financial accounting only past or historical transactions are recorded and analyzed whereas it does not take into account future transactions no matter how important it is for the business of the company. Hence in a way financial accounting does not help in making any changes because it records and analyses only things which have already happened and we all know that the past cannot be changed it can be only analyzed.
- Financial accounting is made for various external parties who are interested in the business of the company; these external parties include parties like creditors who have given the loan to the company, shareholders who have invested their money in the company, income tax authorities for ascertaining the income tax liability of the company and so on.
- Financial accounting is based on concepts and conventions of accounting which have to be followed strictly by the person preparing the final accounts of the company which in turn results in lesser flexibility as one has to go by the rules of accounting while preparing financial accounts.
- Financial accounting forms the basis of other branches of accounting like cost accounting, management accounting and also for other advanced accounting methodology as financial accounting contains all the first hand or raw data in the books of original entry like journal and ledger, which can be used by other branches of accounting easily.
As one can see from the above that financial accounting has many characteristics or features which are unique to financial accounting and every person who is using accounting should be well versed with the features of financial accounting because financial accounting to accounting people is like water to human body, just like without water human body cannot survive in the same way without learning financial accounting an accountant cannot survive.