Finance Accounting

By: EconomyWatch   Date: 30 June 2010

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Finance Accounting or Financial Accounting is a branch of accountancy dealing with the preparation of financial statements for various decision makers such as stockholders, suppliers, banks and various government agencies. Financial statements contain statements of the income or expenditure of the company or organization and a summary of the assets, liability and the shareholder’s or owners’ equity in the company. Owner’s equity is also understood as the value of the useful assets of the company that ownership of the company entitles one to claim.

Finance Accounting is basically used to prepare accounting information for people outside a particular organization who are not concerned with the day-to-day operations of the company. Managerial Accounting in this way provides useful help with providing accounting information for managers to make critical decisions for efficient running of the business.

The fundamental need for finance accounting is the need to avoid the principal-agent problem by measuring and monitoring the agents’ performance and reporting the results to the concerned parties. The principal-agent problem is defined as circumstances when a principal compensates an agent for performing certain acts that are beneficial for the principal but costly for the agent. This mainly arises due to asymmetric information, uncertainty and risk. Various mechanisms used to match the interests of the principal with those of the agents are reflected in the many compensatory benefits forwarded-from commissions to profit sharing to efficiency wages.

Financial accounting practices in any country has to conform to the Generally Accepted Accounting Principles (GAAP) of the respective country and apart from making financial statements as previously mentioned, finance accounting serves the provisions of providing information used by the management of businesses to evaluate the performance of the company or decision making or planning purposes. It also abides by the regulatory requirements of the concerned parties of the companies concerned. Finance accounting, financial accounting or financial accountancy can be illustrated as consisting of accounting equation (Assets=Liabilities + Owner’s Equity which determines that part of the company’s assets which can be claimed by its owners), financial statements and the trial balance.

The trial balance is usually factored in the financial statements by using the double-entry accounting system and all the figures in the trial balance are then rearranged to make a profit and loss statement and a balance sheet. It should be noted in this context that assets, expenses and withdrawals have normal debit balances and liabilities, revenues and capital have usual credit balances. Certain accounting standards that will determine the format of the finance accounts is the, FRS (Financial Reporting Standards) and the IRS (Internal Revenue Service).

In case of the USA, the independent agency which establishes the GAAP is the Federal Accounting Standards Board (FASB). Finance Accounting can also be treated as studies of Finance and Accounting practices which includes accounting software, business insurance techniques and strategies, cash management, budgeting, taxes, financial reporting, debt and personal finance. The Defense Finance and Accounting Service (DFAS) an accounting firm of the Department of Defense in the USA is responsible for identifying and implementing finance and accounting requirements to current and retired military personnel who served the USA.


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