Financial Accounting Procedures, Covering Concepts & Objectives

Learn financial accounting procedures, definitions, concepts, and objectives followed by an accountant when producing statements.

Financial Accounting Procedures and Meaning

This division of accounting is an independent division of accounting that tracks the financial transactions of the business. These transactions are recorded, summarized, and displayed on a statement like the balance sheet or the income statement using standard accounting practices and guidelines. In other words, this is a process for reporting the operations and financial information of the enterprise to creditors. Investors and others outside of a business also need this type of information.

The definitions cited above warrant their primary purpose. That means, it shows a fair and accurate picture of a firms financial state. Professionally, that bookkeeping should include certain principles, specific rules, equations, and concepts.

Financial accountants, then, arrange the business transactions according to accounting principles. All financial statements must conform to the International Financial Reporting Standards. In closing, it is very important to make clear that the role of this type of accounting is not to give an account of a firms worth. Its purported aim is, instead, to provide sufficient information so that others can judge for themselves the worth of a firm. In this respect, it needs to conform to established accounting standards.

Basic Accounting Concepts

Accounting is the science and art of managing transactions. These processes can be recorded, classified, stored, and aggregated for the purpose of auditing. It is guided by five core financial concepts which should be followed in the accounting standards.

The accounting equation

This equation is considered the basis for bookkeeping. It shows that assets are equal to liabilities and equity.

Debits and credits

Debits and credits, forming a dual-entry system most businesses employ. The debit system increases assets or liabilities, and the credit system reduces assets or increases liabilities. In a book, you will notice the debit is placed on the left hand side and credit is placed on the right hand side.

GAAP

GAAP, generally accepted accounting principles, is a third accounting concept which provides a set of principles to which companies are required to abide. This way, there is a systematic process of uniformity and consistency.

Financial statement

The balance sheet is the fourth concept in finance, which refers to all financial records that are made of transactions performed by the firm. The main purpose of having financial statements is to identify a firms capacity to repay its debts and ability to produce revenue. These statements also show management where there is need for process improvement and better internal control to meet sound accounting policies.

Flow of income and expenses

The latter accounting concept relates to the way that the business records cash flows in its statements in terms of revenue and expenses. There are two ways of doing that: cash outlays or claims. The cash method records revenues and expenses in real-time, as they are received and paid out. With the accrual method, however, they are recorded on general ledgers as accounts receivable and accounts payable.

Objectives of Accounting

It is integral to all types of businesses, like small businesses, medium-sized businesses, and big companies. It is a branch of accounting that deals with the preparation of financial statements to those responsible for the statements, such as shareholders, banks, public authorities, suppliers, employees, owners, and other interested parties. Accounting may be the single most crucial data-driven approach that your business needs.

The goal is to produce two essential financial reports, a balance sheet along with the profit and loss report. Predictive software systems utilize an accounting journal for classifying financial activities within a business itself. Such accounting organises the accounting information for people outside of the organization, those not actively involved in the day-to-day operations of the business. It provides information, through income statements and other reports, that helps managers to make decisions about their businesses. In short, accounting is a procedure of abbreviating financial data using the organizations bookkeeping records, and publishing it, in the form of annual or monthly reports, on a quarterly basis, to benefit those outside of the organization.

Procedures

Businesses create reports to be consumed by a firms creditors, shareholders, and public agencies. Success depends on following established standards, properly reported transactions, and keeping records of business transactions.

Standards Board

It is managed under specific standards that guarantee the reporting is up-to-date. The execution of which is to provide credible statements about a firms financial position at any given time period. Large organizations and other large businesses typically regularly produce reports, at least once per year. The report does not make any assumptions or offers any recommendations about a company’s financial condition.

Rather, it reports objective financial details, presented in a specific format, so that a view can be understood. This kind of accounting creates a public record of the firms historic financial actions, which allows shareholders and others outside of the firm to get a clear picture of a firms cash position. Because the accountants in finance adhere to a limited set of principles; the stockholders can rest assured that the details they are getting are objective and accurate. They can make preemptive assumptions about functions, and rely upon these assumptions for future money decisions.

Accounting and Reporting

There are two basic types of accounting for businesses, management and finance. Management accounting is focused on understanding the money details to be used internally in an organization, helping managers to make precise decisions. Management accounting statements can be of any design, and they need not adhere to specific accounting procedures. However, they should adhere to best practices and ethical standards. Finance, by contrast, follows normal procedures, not being used in everyday decisions made in the office.

One key difference between management and cash accounting is that management statements consider future financial requirements of an organization, whereas cash accounting statements focus strictly on past, historical financial functions. Since the monetary accounting statements are accessible to different persons outside of a business. A system of following transactions affecting an organizations monetary state thus accounts for this kind. This accounting provides managers with the details needed to make effective decisions, and it provides the foundations on which stakeholders can compare the functions of a firm to those of another. It is inevitably the process by which financial conditions are read out and reported by the firm to any desired parties.

Accounting transactions

Proper procedures should be followed at all times. The cash statement made during processing acts as a snapshot of a firms financial state at any given point in time. This subject also speaks further of a definition, since it addresses an organizations accounting for transactions within the firm.

These cover various types of events such as sales returns, sales, procurements, purchases of inventories, labour costs, and productivity costs. The company records every event that occurs, which then becomes the basis of financial statements that the company presents at year-end. Many argue that this type of accounting might not be an ideal way of showing the firms positions, since assigning a financial value to an intangible asset is difficult. These can include things like positive public perception, employees satisfaction, large customer bases, and other assets that are difficult to value.

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