The uses of financial accounting have few limits in a business environment. Companies can “keep score” by calculating the amount of revenue earned from operations and economic wealth generated for assets in the company, comparing business operations with another firm or remaining compliant with current laws and regulations. Companies must follow specific accounting principles or guidelines when reporting financial accounting information. These guidelines — often dictated by national or international accounting agencies — create mandates for all uses of financial accounting to ensure internal and external stakeholders can have some assurance on the similarity of reported transactions.
The income statement reports the sales revenue, cost of goods sold and expenses for a particular time period. Using this statement, companies can accurately determine how much profit they made during this period. While the income statement is common to all companies, it only reports an accounting figure as profit. The number does not necessarily relate to any actual asset or cash balance in the company’s general ledger. This statement allows companies to show stakeholders how much money the company had to spend to generate certain levels of revenues.
One of the other uses of financial accounting is to calculate the amount of economic wealth created by a company. Owners and managers will determine this figure using the company’s balance sheet, which reports all assets, liabilities and retained earnings, or net profit reinvested into the company. The basic formula for this is to subtract total liabilities from total assets; the remaining figure — whether a positive or negative amount — represents how much wealth the company truly earned for a time period. The balance sheet is typically the most important among the different uses of financial accounting.
Once a company creates its financial statements, owners and managers can create a range of ratios for benchmarking purposes. Benchmarking allows a company to compare its financial statements with a competitor’s information, if available. While financial statements are common under the many uses of financial accounting, they can be difficult to compare in terms of dollars. Ratios that measure profitability, liquidity or total debts to total assets provide more measurable percentages for benchmarking.
Financial accounting also helps a company remain compliant with government agencies. Publicly held companies are often under intense scrutiny to ensure they provide an accurate financial picture to investors. Financial accounting statements and reports provide investors with a brief look into a company’s financial health. This information also ensures the company properly reports income so it pays the required amount of income taxes per current law.
