Financial accountancy 

(or financial accounting) is the field of accountancy concerned with the

preparation offinancial statements for decision makers, such as stockholders, suppliers, banks,
employees, government agencies, owners, and other stakeholders. Financial capital maintenance can be
measured in either nominal monetary units or units of constant purchasing power.[1] The fundamental
need for financial accounting is to reduceprincipal-agent problem by measuring and monitoring agents'
performance and reporting the results to interested users.

Financial accountancy is used to prepare accounting information for people outside the organization or
not involved in the day to day running of the company. Management accounting provides accounting
information to help managers make decisions to manage the business.

In short, Financial Accounting is the process of summarizing financial data taken from an organization's
accounting records and publishing in the form of annual (or more frequent) reports for the benefit of
people outside the organization.

Financial accountancy is governed by both local and international accounting standards.

Basic accounting concepts

Financial accountants produce financial statements based on Generally Accepted Accounting
Principles of a respective country. In particular cases financial statements must be prepared according to
the International Financial Reporting Standards.

Financial accounting serves following purposes:

 producing general purpose financial statements

 provision of information used by management of a business entity for decision making, planning
and performance evaluation
 for meeting regulatory requirements
 What Does Financial Accounting Mean?
Reporting of the financial position and performance of a firm through financial statements issued
to external users on a periodic basis.

 Investopedia explains Financial Accounting

The key difference between financial and managerial accounting is that financial accounting is
aimed at providing information to parties outside the organization, whereas managerial
accounting information is aimed at helping managers within the organization make decisions.

Accounting isn't everyone's favorite subject. I know it isn't mine. But that doesn't change the fact that
if you're in business, or thinking about owning one - even if as an investor, you'll need to know how
to read and analyze the four financial statements that matter most. Some of them are known by
other names, but for our discussion here, we'll stick to these names:

 Balance Sheet
 Profit and Loss Statement
 Cash Flow Statement
 Statement of Retained Earnings

All of these financial statements have special significance, but ultimately, each has one common
goal...

Show me the Money!

Let's take a look at each of the four financial statements in detail, starting with...

The Balance Sheet

The Balance Sheet is a statement of...

 Assets: What the business owns

 Liabilities: What the business owes
 Capital or Equity: What the owners and shareholders own after all liabilities have been
paid.

And it looks something like this...

The balance sheet got its name from the fact that its two sides must balance. On the left side, you
will see the table of assets, and on the right side, you'll see liabilities and equity. The way to balance
the balance sheet is to use this calculation:

Assets = Liability + Equity

In other words...

Assets - Liabilities = Equity

Looking at the assets and liabilities columns, you will notice each has current and long-term items.

Current assets are short-term assets such as cash, accounts receivable and inventory, while long-
term assets include land, property and other fixed assets. Essentially, current assets are those items
which can be easily and quickly converted into cash.

Current liabilities are short-term liabilities such as accounts payable and short-term loans. Typically
current liabilities are those which are due within the next 12 months. So if a company has a long-
term liability such as a mortgage on its property, the mortgage amount payable within the next 12
months will be listed as a current liability. Long-term liabilities include mortgages as mentioned, or
long-term loans.

How does a balance sheet help you make financial decisions? Well, it tells you what assets and
resources the company owns, and what its financial obligations are to its creditors. Looking carefully
at a company's balance sheet, you can know whether a company is able to meet its long-term
commitments.

The second of the four financial statements we'll look at is...

The Profit and Loss Statement

The profit and loss statement focuses on the profitability of your business. Its purpose is to show
whether the company is earning a profit or whether its losing money. However, it's especially
important to look at the profit and loss statement in context - it's common for a very profitable
company to record a loss from time to time, due to many factors. Comparative financial statements
let you see the company's performance in context (and that's actually true for all four financial
statements).

The profit and loss statement lists the company's revenue, expenses and earnings. A simplistic way
to understand this statement is to look at this calculation...

Net Profit = Revenue - Expenses

Here's what a profit and loss statement looks like:

  

Revenue, as you already know, is money that the company makes. Expenses is the money that the
company spends.

However, notice that in the profit and loss statement, some costs are listed directly below sales, and
deducted from sales. These are the costs of goods sold, or direct cost of sales. The costs are
directly related to selling the company's products or services.

Gross margin is the company's sales revenue, minus those direct costs. You'll often see gross
margin expressed as a percentage. This percentage is calculated as...

Gross Margin % = Gross Margin ÷ Total Sales

So, the profit and loss statement will give you insight into the company's profitability.

Now, let's talk about the third of the four financial statements...

The Cash Flow Statement

The cash flow statement may often show you a different picture to what the profit and loss statement
says. It's not unusual for a business to be profitable, yet face financial difficulty due to cash flow
 problems. In fact, many profitable businesses have gone under because of poor cash flow
management. So, in many ways, the cash flow statement is the most important of the four financial
statements.

So what is a cash flow statement, and what is its purpose?

A cash flow statement illustrates the inflow and outflow of cash within the business. It shows where
the cash comes from into the company, and how it's used. In the end, it lets you know how much
cash is left after deducting outflows from inflows and any existing cash balance.

In other words, the cash flow statement tells you whether the business has enough cash to carry on
doing business and pay its bills.

The cash flow statement is created from:

 Beginning and ending balance sheet for a specific period

 The profit and loss statement for the same period

There are two important indicators in the cash flow statement:

 Positive or negative cash flow

 Positive or negative cash balance

A business aims to maintain a positive cash flow. But it's both normal and acceptable for the
business to have negative cash flow from time to time. Negative cash flow simply means more
money exited the company's balance sheet than came in during a specific period. The key is achieve
positive cash flow on a consistent basis.

However, more importantly - to the success or detriment of the business - is the cash balance. Think
of cash balance as the money you have in your bank account. If the balance were to run down to
zero, you'd be bankrupt. And also that's true of any business which falls into negative cash balance.

Simply put, ending cash balance is calculated as:

Ending Cash Balance = (Beginning Cash Balance + Cash Received) - (Cash Invested + Cash
Spent)

And here's what a cash flow statement looks like...

The cash flow statement lets you determine how strong a company's cash balance is. It also gives
you an indication of how efficiently it manages its business.

And finally, let's look at...

The Statement of Retained Earnings

The statement of retained earnings is the last of the four financial statements. This statement
focuses on changes in retained earnings. It's closely linked to the balance sheet. If you remember,
we talked about equity earlier. Retained earnings is what's left in the company's equity after any
additions and subtractions to the beginning equity.

In simple terms...

Ending Equity = Beginning Equity + Investments + Income - Withdrawals/Dividends

The ending equity in turn shows up on your balance sheet.

Wrapping Up

As you can see, all of the four financial statements are interactive. Each one affects or is affected by
the other in one way or another. Even though they each serve a unique purpose, they all have one
common goal: to evaluate the health of a business.