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).
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
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.
Disclaimer: This content is authored by an external agency. The views expressed here are that of the respective authors/ entities and do not represent the views of Economic Times (ET). ET does not guarantee, vouch for or endorse any of its contents nor is responsible for them in any manner whatsoever. Please take all steps necessary to ascertain that any information and content provided is correct, updated and verified. ET hereby disclaims any and all warranties, express or implied, relating to the report and any content therein.
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.
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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).
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Balance SheetA 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.
Disclaimer: This content is authored by an external agency. The views expressed here are that of the respective authors/ entities and do not represent the views of Economic Times (ET). ET does not guarantee, vouch for or endorse any of its contents nor is responsible for them in any manner whatsoever. Please take all steps necessary to ascertain that any information and content provided is correct, updated and verified. ET hereby disclaims any and all warranties, express or implied, relating to the report and any content therein.