Benefits of Financial Accounting

Following are some of the advantages related to financial accounting

1. Systematic maintenance of Business Records

Companies need to keep a record of all transactions incurred for business purposes. Proper books of accounts are systematically maintained to record all the business’s monetary transactions.

Keeping a record of all the business transactions is crucial for every business because

  1. Financial record is required to report financial performance.
  2. Keeping a financial record is a regulatory requirement.
  3. Used in the preparation of the financial statement.
  4. Used by auditors to obtain sufficient and appropriate audit evidence.

2. Fraud Detections

Financial accounting involves recording all business transactions in business records that ultimately help to prevent and detect any frauds that may occur. If all business transactions are recorded on a timely basis, it becomes difficult for people to engage in fraud. However, if fraud is still conducted using sophisticated techniques like recording complex business transactions and fictitious journal entries, etc., it can be detected during the audit with the help of a maintained accounting record.

3. Financial Position of a business

Reveals the true financial position of a business. Financial information is provided to the internal management from time to time to analyze what is the true financial position of an entity for a specific period. Managers make decisions based on the data supplied by financial accounting departments, e.g., if the business needs to arrange some financing for meeting the working capital requirements.

4. Preparation of Financial Statements

Financial accounting facilitates the process of forming a financial statement as it provides all relevant accounting data necessary for the preparation.

5. Facilitates loan arrangements

Financial institutions provide loans to companies after ascertaining a company’s financial health by looking at the financial statements provided by those entities. Likewise, banks may require collateral for the assets, and the company must provide ownership documents.

6. Performance analysis

Accounting data is used to assess the results of a business in comparison to previous years and the industry average. For example, the profit and expenses ratios are compared with the industry average and last year to ascertain if the business is doing well or there is a need to take corrective action.

7. Control over Assets

Financial accounting enables control over a business’s assets. It provides information regarding balances of cash, debtors, other assets, etc.

8. Taxation

Proper books of accounts are crucial for determining the tax liability of a business. If a business doesn’t have proper financial data, it can be difficult to determine profit figures. Usually, a specified profit percentage is paid as a tax expense to the government.

9. Assists management in Decision making

Management needs financial accounting data to make managerial decisions. For example, suppose there is a shortage of cash. In that case, management makes decisions for arranging some loan facilities by looking at financial data to ascertain how much cash resources are needed to run business operations.

10. Act as legal evidence

Business disputes can be settled by presenting accurate accounting records in the courts. So financial accounting records act as legal evidence to settle business disputes with other parties. Therefore, it becomes a need to maintain proper accounting records to avoid any disputes in business.  

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