Financial accounting covers an area of accounting generally referred to as reporting. Financial accounts are prepared for various user and stakeholder groups and as such they have many different objectives for the different groups and a very wide scope. The scope of financial accounting includes recording transactions, summarising information, analysing information, reporting information and presenting it for use by groups that include owners, management, creditors, government authorities and other external stakeholders. Through looking at the different users and their needs for the information and how financial accounting serves them we can grasp the full picture of the scope of financial accounting. Also read the nature of financial accounting.
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Reporting performance and position
Reporting the performance of an organisation as well as the state of the organisation are the primary purposes. This can be seen through alternate names for the income statement and balance that were mooted for them namely the statement of financial performance and the statement of financial position. Reporting is not limited to direct stakeholders such as shareholders, there are many who are indirect or remote stakeholders of public and private companies who rely on the information provided by financial accounting. Therefore the scope of financial accounting has evolved over the years to accommodate these various user groups in the information published in the financial statements.
Shareholders invest their money, directly or indirectly and appoint a board of directors which in turn works with management and employees to run the business for the benefit of shareholders. Shareholders therefore rely on financial reporting to inform them of how well their resources are being managed by those they have appointed to do so. Therefore the scope of financial accounting information must be such that it gives an overview of the entire business in its totality. Accounting information must also satisfy the qualities of being accurate, reliable and timely. The information shareholders are most concerned with is presented in the financial statements in the Income Statement, Balance Sheet, Cash Flow Statement and the notes to the financial statements.
Reporting to the public
Publicly traded companies accounts are relied on by more than direct shareholders. As a result of being publicly sold the scope of financial accounting information provided by these companies must also include the needs of potential investors to enable them to determine if they desire to invest in these companies. This is why publicly traded companies are required to publish their financial statements and make them publicly available. Public users of financial information will find the information they need in the Balance Sheet and notes to the financial statements.
Reporting to creditors
Creditors are businesses or individuals that ordinarily do business with a company and extend credit to them. Extending credit has the risk of default through liquidity challenges or insolvency and it is very important for them to know how well companies are doing. The two biggest questions creditors always deal with are who to extend credit to and how much credit to extend to them. Through the use of liquidity financial analysis ratios such as the quick ratio, acid test ratio and the interest cover ratio to assess the creditworthiness of a company. These ratios are calculated from information found in the Income Statement and Balance Sheet, the two most notable products of financial accounting.
Reporting to customers
Business has evolved and so have the relationships that companies have with their different external stakeholders. One important group that has a big influence on the scope of financial accounting are the customers of a business. Customers nowadays feel closer to an organisation than ever before. They want to know more about its business practices, the supply chain, its approach to sustainability and corporate social responsibility. The financial statements and financial accounting information have grown in scope to encompass these and other issues in order for the statements to continue to satisfy the needs of customers.
Reporting to employees
Management does not directly report to employees per se. However employees are vital part of the system of a business. What is important to employees is job security through the continued viability of a business. In organised labour unions and trade associations look after the welfare of employees through the relationships they maintain with their employers. This is of course on a collective level rather than the individual level. The scope of financial accounting has adjusted over the years to allow these groups more information about employee relations and human resource practices in an organisation.
Reporting to Government
Governments are of course interested in the activities of businesses operating within their jurisdictions. The obvious example of this is earning information for tax purposes as governments rely on tax revenue. However there is more to it. The scope of financial accounting information also covers employment data through taxes such as Pay As You Earn (PAYE). The government uses information in the process of gathering statistics on employment. Other taxes such as Value Added Tax (VAT) also fall under the scope of financial accounting information.
Reporting to communities
Businesses, both large and small operate in communities. We could go a step further and say they are part of communities. As this view of businesses grows the combination of government and community pressure has mandated that the scope of financial accounting when it comes to the se businesses be expanded to include their impact and efforts in the community. Their work in and with the community is now importance. A great example of this at play are extractive industry companies such as miners who have been increasingly burdened with a responsibility to the communities they operate in above and beyond any obligations to their employees and suppliers. Company annual financial statements have grown in size as businesses go further and further to show their involvement in the communities they benefit from.
In conclusion the scope of financial accounting has broadened over time. From its traditional roots of shareholder, creditor and government appraisal it has transformed into a communication tool between companies and creditors, employees and communities at large.