Financial accounting is one kind of accounting different from the management accounting in the accounting system. As management accounting is for “internal” whereas financial accounting is for “external”. The following is a detailed explanation and analysis of the major objective and role of financial accounting.
The purpose of financial accounting is to measure the performance of the entity and therefore provides the financial information to different stakeholders. Stakeholders will have their decision - making according to the financial report issued. James, Arthur and Robert(1978) have stated that:
“Most decisions are made on the basis of summary-type reports rather than firsthand information.” A comprehensively summarized financial report provides interaction of firm and stakeholder.
Before more deeply understanding financial accounting, it needs to first know that what relevant information is when taking about financial accounting. Financial report is composed by a great deal of relevant information. Relevant information is that information must fulfill two fundamental qualitative characteristics, Relevance and Faithful representation, and have necessity to conform several enhancing qualitative characteristic to ensure its usefulness. According to Statement of FASB (2010), Relevance means financial information should be capable of making a difference in the decisions made by users. For example, to replace old equipment, the relevant information is the cost of the new equipment but not the original cost of the old equipment. Also, to ensure the financial information is capable to make a difference, it should have either predictive value or confirmatory value: the former is about users’s anticipation of an entity’s prospect and the latter is about providing feedback for users to examine whether their prediction suits the present, or in other word, compare the reality with their prediction.
Besides this, Faithful Representation make up the...
References: James J, Arthur J and Robert H(1978).Financial accounting.Dame publications Inc.
Walter T, Charles T and C. William(2010).Financial accounting,8th edition. Pearson Education Inc.
Chapter 3: Qualitative Characteristics of Useful Financial information(2010).Statement of Financial Accounting Concepts No.8. Financial Accounting Standards Board.
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