What is financial accounting?

Financial accounting is the production and reporting of general purpose financial reports for external users to make decisions and evaluate the financial health of a company. 

In other words, anything an accountant produces that is to be viewed by someone outside the business is known as financial accounting.

General Purpose Financial Report

Woolworths Limited Financial Report 2022

Source: Woolworths Limited

General-purpose financial reports are financial reports used by external users that inform on the past financial performance, position and other activities of a company. 

General-purpose financial reports could include: 

• Statement of Financial Position (Balance Sheet) 

• Statement of Comprehensive Income (Income Statement) 

• Statement of Cash Flows 

They are called general purpose financial reports as they do not serve a specific purpose and provide an overview of the company's financial as a whole for a certain period. 

External Users 

External users are people who rely on general-purpose financial reports to make financial decisions and to evaluate the financial health of the company. 

External users could include: 

• Investors: used to decide whether to hold, sell or accumulate shares in a company 

• Financial Institutions: used to determine a company's accessibility to a loan 

• Government: The Australian Tax Office (ATO) could use financial information to determine the appropriate level of tax to be paid by the company. 

• Creditors: used to determine the level of risk of the company 

Frequency 

General-purpose financial reports are required to be produced on a periodic basis. Most public companies by law, are required to produce general purpose financial reports once a year but those listed on the ASX are often subject to even tighter regulation with the production of quarterly and half-yearly reports as well as the annual report.

Rules and Regulations on General Purpose Financial Reports

The production of general-purpose financial reports is subject to strict rules and regulations. The production of these reports must confine by: 

• AASB Standards 

• Accounting Conceptual Framework 

• Corporations Act 2001 

• ASX Listing Rules (if listed on the ASX) 

The heavy regulation ensures that external users are not misled and that the financial reports represent a true and fair view of the financial health of a company. Most reporting entities are required to have their general purpose financial reports to be checked by an independent accountant known as an external auditor.