What is Financial Accounting?
Definition of
Financial Accounting, Financial Accounting
Meaning - The Economic Times
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What is Financial accounting
Financial Accounting
Introduction
It is a primary responsibility of a registered company to
review the performances, progress and needs for
improvement of the firm over a financial year. This helps the
organization to assess the overall economic condition,
diagnose and resolve issues at once. This is precisely why
accounting plays an inevitable role in maintaining the
records and statistics, concerning the transactions of a
company every year. The status of the expenses, information
management and reports need to be filed promptly to save
confusions and efforts that might be uncalled for, later. The
role of a financial Accountant is crucial in such
documentations.
What is Financial Accounting?
Financial Accounting is the process of documenting,
analyzing and reporting every transaction of a business or an
organization, in order to assess the financial health and
stability of the same. There are a set of guidelines to be
followed according to the Financial Accounting Standards
Board (FASB), US. These are also known as Generally
Accepted Accounting Principles (GAAP), formulated to
provide ease, credibility and uniformity to the accounting
processes across companies.
The records of the transactions are done using the Double-
entry method where an amount is entered twice as credit
and debit. For example, there is a receipt of a loan of $10000
dollars from a bank. This gets entered as a credit in the
account and also marked as the amount payable. Therefore, a
balance of credit and debit is attained.
Types of Financial Statements
Income Statement
An Income Statement is a document of Revenues, Expenses,
Profits and Losses that large businesses generate in a period
of time. The other names of this documentation are ‘Profit
and Loss statement’, ‘Net Income Statement’ and ‘Statement
of Earnings’. It is crucial in tracking the scopes of growth,
analyzing the highs and lows in data and taking actions to fix
them. An income statement is used internally (among the
directors, managers and employees) and externally (to
circulate among creditors and investors). The content of the
statement includes Revenue, expense, Comprehensive
income and Cost of Goods sold (COGS).
Balance Sheet
A balance sheet serves as an evidence of a company’s
credibility. The Contents of this sheet include Assets,
Liabilities and Equity. The assets can either be current or
fixed based on their convertibility, tangible or intangible
based on the existence and operating or non-operating. The
Revenues can be current or non-current. The difference
between the two is that the former is short term like
interests, loans and the latter is long term like taxes and
bonds. An equity denotes the net value of a company from
the stocks and investments. A shareholder’s equity can be
positive (where assets exceed the liabilities) or negative
(where the liabilities exceed the assets).
Cashflow Statement
A Cashflow Statement is a record of liquidity, retained cash
possession and indication of changes in assets, liabilities or
equity, if any. There are three sections in this statement
namely, Operating activities, Investments and Financial
activities.
Cashflow of Operating activities records the amount payable
in wages to the employees, interests, taxes and transactions
regarding the same.
Cashflow of Investments include the records of transactions
in purchases of assets or loans, profits and losses made for
investing purposes.
Financial Activities of Cash flow shows the repayment of
debts, repurchases of stocks, equity and dividends.
Statement of Changes in equity
This document is drafted to assist all the shareholders,
investors to understand and make decisions regarding every
movement in equity. The statement has notes of opening and
closing value of the equity and all the net income, dividends
and changes of owners and accounts that happen in between.
This is also called the ‘Statement of Retained Earnings’.
Financial Vs Management Accounting
Managerial accounting is the one done in the view of
notifying the managers, directors and authorities of an
organization regarding the everyday operations, present and
future trends in the market, assumptions and plans to be
made for the future. The audience is internal. However,
financial accounting is a documentation of every transaction
for the audience outside the organization as well like
competitors, investor and bankers. It has strict guidelines to
be followed according to GAAP whereas managerial
accounting has no mandatory guidelines.
Types of Financial Accounting
There are two types of accounting that one needs to be aware
of. The first one is the Cash Accounting where the transaction
entered are only recorded upon the receipt of the cash. There
is no clarity if there was any revenue or expense generated
in between. This is applicable only in small businesses where
there is no requirement of any statement, a few transactions
are to be recorded, it has limited fixed capital and few
employees. Though the single-entry method is easy to
maintain and transparent in liquidity, it is considered to be
not accurate and is not accredited by Companies Act.
The second method is the Accrual Accounting which works
on two principles, revenue recognition and matching
revenue. It records every transaction digitally. The revenue
earned but amount not received will find its place in the
asset account whereas the expense occurred and cash not
paid cases will find their places in the liabilities account. This
is the most accurate and detailed form of accounting
followed by every business operating in a large scale.
Importance of Financial Accounting
Financial accounting is important to track and analyze
performances and transactions of a business over a period
of time.
The transparency and reliability of accounting is crucial in
evaluating management policies and creating budgets.
It is used to compare reports so that stakeholders and
investors can decipher and use the data to make better
decisions in the future.
It provides clarity in internal and external communication
regarding the sources and destinations of finances in the
company.
Which is better in Cash Vs Accrual accounting?
The Accrual method of accounting is more accurate and
detailed whereas the cash method is simple yet misses
details. If the business is getting bigger, it is wise to opt
accrual accounting.
What is the scope of Financial Accounting?
Financial accounting is an inevitable part of business
auditing. Every company or business is mandated to file
statements. It is sure to bring more technological and
analytical advances in the field of accounts.
What is financial accounting definition and example?
Financial Accounting is the process of recording,
summarizing and reporting transactions and revenue-
expense generations in a time period. For example, investors
or sponsors need to verify an account statement before
showing interest in associating with the business. So, it is
important to analyze and report the business transactions to
give and have a better understanding.
What are the principles of Financial accounting?
The principles of financial accounting are objectivity,
recognition of revenue and expense, matching and
consistency.
What is the difference between income statement and
balance sheet?
An income statement is a record of revenue, expense, gains
and losses whereas the balance sheet is that of assets,
liabilities and equity.
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