This is done by systematically recording the business transaction in the proper books of accounts with the view of preparing the financial statements, and these usually takes the form of a balance sheet, profit loss account and cash flow statement.
Following are some of the features of financial accounting:.
First and the most important aspect of financial accounting is that it considers only transactions, which are financial in nature, i.e. those that can be expressed in monetary terms. It may be the case that other sources of information are just as important if not more important than the information contained in accounts. For e.g. a research carried out by bankers shows that a bankers personal interview with the client is as important as financial information. The information the bankers are trying to derive from the interview is more qualitative like an impression of the ability of the applicant to run a successful business which is very important but has no place in financial accounts.
One question cannot be answered by financial accounting as to how the enterprise is going to fare in the future in particular because it is largely if not exclusively based on the past and takes no account of future uncertainties. Past results may be taken into account as one piece of information amongst many when one is trying to predict the future but in a changing world it is unlikely the past result will be repeated, as conditions will have changed. Thus it might not be the best tool used for forecasting.
There are several groups of people who may have an interest in the finances of the business. The law says that they have a legal right to certain information. An example of this can be Banks, where a business hopes to get permission for an overdraft or when they apply for a loan. In this case the bank manager would like to know how much the assets would sell for if the firm ceased trading. He could then see what the possibility would be of the bank obtaining repayments of its load.
