What is the primary purpose of financial accounting?

The primary purpose of financial accounting is to provide information about the financial position and performance of an entity to external users. This involves creating financial statements such as the balance sheet, income statement, and cash flow statement, which summarize the financial activities of a business over a specific period. These statements are essential for various stakeholders, such as investors, creditors, regulators, and analysts, as they need reliable and standardized information to make informed decisions regarding investment opportunities, creditworthiness, and overall financial health.

External users rely on the standardized forms of financial accounting to assess how well a company has performed financially and what its current financial position is. This transparency helps foster trust and accountability, enabling various external parties to evaluate the company's profitability, liquidity, and solvency.

In contrast, tracking daily business expenses, managing payroll, and ensuring compliance with tax regulations are important functions within an organization, but they do not encapsulate the broader objective of financial accounting. These activities may fall under the umbrella of managerial accounting or administrative finance, which focus more on internal decision-making, rather than the external reporting purpose that financial accounting serves.