Financial accounting is a field of business accounting that aims to provide financial information to your company’s external users. It is also known as external reporting because your company’s financial statements or financial reports are made available to people outside the company. These external users of financial information include owners or stockholders, creditors, customers, financial institutions, regulatory bodies, tax authorities or investment analysts.
Comparing Financial Accounting with Management Accounting and Fund Accounting
To have a better understanding of the scope of financial accounting, let us compare it with other fields of accounting like management accounting and fund accounting. While financial accounting caters to external users, management accounting provides forecasts, budgets and management accounts to internal users (e.g. management, owners, employees). On the other hand, fund accounting is mainly used by non-profit organisations to track how money from grants or donations have been spent. Unlike financial accounting and management accounting, fund accounting focuses on accountability rather profitability.
Accounting Standards and Financial Reporting
Since financial accounting caters to a wide range of external users, it is critical for this field of accounting to be governed by accounting standards and generally accepted accounting principles. These are a set of rules implemented by international, regional, or country- specific accounting bodies to ensure that financial reports and financial statements are prepared consistently by financial accountants and can be readily understood by knowledgeable users of financial information. For example, International Financial Reporting Standards (IFRS) is a set of rules developed and maintained by the International Accounting Standards Board. In Singapore, our Accounting Standards is issued by the Accounting Standards Council of Singapore and it is known as Singapore Financial Reporting Standards (FRS).
Depending on the accounting standards and generally accepted accounting principles applicable to your company, a complete set of financial statements usually includes an income statement (or statement of profit and loss), a balance sheet (or statement of financial position), a cash flow statement (or statement of cash flows) and a statement of changes in stockholders’ equity. Professionals who are knowledgeable and experienced in the preparation of financial statements are called financial accountants. Because accounting bodies regularly update accounting standards to keep up with the needs of external users and the complex transactions of various business industries, financial accountants are also expected to be up to date with these updates and amendments in accounting standards.
Why Do You Need a Financial Accountant?
As an investor or business owner, you will enjoy the following benefits when you rely on a financial accountant or a professional services firm specialising in financial accounting:
- Compliance with accounting standards. You can take comfort that there will be zero or minimal penalties, if any, from regulatory bodies when they assess your company for compliance with accounting standards.
- Timeliness of financial reporting. Together with other external users of financial information, you can make relevant and informed decisions in a timely manner.
- Efficiency in business management. You can spend more time running the business rather than getting worked up with financial accounting requirements.
- Increased business insight. Financial accountants will help you understand the value of your company from a financial accounting perspective (e.g. book value, net assets, net income, cash basis vs. accrual basis). With this knowledge you can determine the value of your company and see how your company performs against your competitors.
- Financial Statements are used for corporate tax computation. If they are not accurate, the tax computation will also be inaccurate. This may lead to tax issues in the future.
- For a Group with Parent and Subsidy Companies, Consolidation of Accounts may be required.
Seeking help from a financial accountant is rewarding but it also initially involves investing time to equip your accountant with the information he needs to translate your business transactions into general purpose external reports (e.g. financial statements).
Overall, the choice on whether to outsource the financial accounting bits of your company to an accountant lies on your business management style. Some owners of start-up companies tend to do everything on their own and only get an accountant once their business operations grow. It is noteworthy that financial accountants will bring value to your company whether you are a start-up company or a well-established one, a micro-entity or large and listed company. If you can afford an accountant (whether part-time, full-time or outsourced), it will be good to hire one at the point of incorporation of company. As such, please feel free to give us a call at (+65) 6876 7906 or email us via the form on the right sight of this page for accounting services, including cheap virtual office and affordable business registration.