Learn the financial accounting procedures, definition, concepts and objectives that accountants follow in the preparation of statements.
Financial Accounting Meaning
This branch of accounting is a distinct branch of accounting which keeps track of financial transactions of a company. These transactions are recorded, compiled and displayed in a statements such as a balance sheet or income statement using standardized guidelines. In other terms, it is a process of reporting business functions and financial information to the creditors. Investors and other people outside the business enterprise also require such information. The above definition justifies its main objective. That means is to display a fair and an accurate picture of the financial conditions of the company.
Professionally, this accounting must contain some principles, equation and concepts. Financial accountants, therefore, organize financial statements on the basis of accounting principles. All the financial statements ought to be generated according to the International Financial Reporting Standards.
In conclusion, it is of great importance to clearly point out that the role of such accounting is not to give a report about the value of the company. Its intended purpose rather is to deliver enough information for other people to evaluate the value of the company organization for themselves. In light of this it must meet established accounting standards.
Basic Accounting Concepts
Accounting is defined as the science and art of processing transactions. These processes could be recording, classifying, keeping, and consolidating for the sake of auditing. It is governed by five basic financial concepts that must follow generally accepted accounting principles or accounting standards.
The accounting equation:
This equation is considered to be the foundation of accounting. It shows that the assets are equal to the liabilities and the equity.
Debits and credits:
Debit and credit, which comprises the double-entry system that most businesses use. The debit system either increases the asset or the liability while the credit system either decreases the asset or increases the liability. In the ledger, you will notice that the debit is placed on the left side while the credit is on the right side.
The Generally Accepted Accounting Principles, GAAP, is the third concept of accounting that provides a set of principles for companies to adhere to. This way, there’s some sort of uniformity and consistency.
The statement is the fourth financial concept and it refers to all the financial records of the transactions made by the company. The main objective of having financial statements is to determine the capacity of the company to pay its debts and its ability to generate income.
Flow of income and expenses:
And the last accounting concept refers to how a company records in the income statement the cash flow of income and expenses. There are two ways to do this: through cash or accrual. Through the cash flow method, revenues and expenses are recorded when they are actually received or released. Through accrual method, when they are earned or incurred.
Objectives of Financial Accounting
This is an integral part of all types of businesses, such as small business, medium and large companies. It is the field of accounting related to the making of financial statements for those in charge of pronouncements, such as shareholders, banks, government agencies, suppliers, employees, owners and other interested parties. Accounting can be the most critical data method that your company will require. The purpose of this is to generate two necessary financial reports, the balance sheet together with the profit and loss statements. A predictable software system uses an account book to categorize the financial activities of the company itself.
Such accounting is used to organize the accounting information for those outside of the organization or who are not interested in the daily operation of the company. It gives information in the income statement and other reports to assist managers in making decisions about their business. In summary, accounting is the procedure of abbreviating the financial data in use of the accounting records of an organization and the publication in the form of quarterly annual or monthly reports for the advantage of those outside the organization.
Financial Accounting Procedures
Financial reports are done for the consumption of company creditors, stockholders and government agencies. Success depends of following established standards, proper reporting and recording of transactions.
It is administered by particular standards to ensure updates in reporting. The performance of this is to make reliable statements on a company’s financial condition at the given time. Big organization and other major businesses usually make reports routinely at a minimum every year. A report does not take or offer advice on the monetary health of a firm. Relatively it reports objective financial details in a particular format for the vision to understand. This type of accounting makes a public record of a firm’s historical financial action that let stockholders and others outside of the company to receive a clear image of a business’s monetary health. Due to the reason financial accountants follow a restricted set of principles; stockholders can be relaxed that the details they are obtaining is objective and accurate. They can create anticipative assumption on function and base future monetary decisions on the assumptions.
Accounting and Reporting:
There are two main kinds of business accounting, managerial and financial. Management accounting aims on understanding monetary details for use within the organization to help managers in making decisions. Managerial accounting statements can take any design and do not have to stick to particular accounting procedure. They however maintain good practice and ethical standards. The financial on the other hand follows usually agreed accounting procedure and is not availed for office decision making. One vital difference between managerial and monetary accounting is that a managerial accounting statement is future based and check the financial requirements of the organization, when a monetary accounting statement is oriented strictly on past, historical financial functions.
As monetary accounting reports are availed by several various people exterior of a company. A system of the following transactions that affect the monetary condition of an organization therefore explains this type of accounting. This trail offers managers with the details they want to take efficient decisions and to offer a basis for stakeholders to compare one function of a company with that of another. It is necessarily the procedure of reading and reporting the financial condition of the firm to all desired parties.
Proper accounting procedures must be followed at all times. The monetary reports made at the time of process serve like a snapshot of a firm’s financial condition at a said time. This topic further speaks to a definition as it addresses the organization’s record keeping of transactions in the firm. These encompass different types of events like sales returns, sales, supplies purchase, inventory purchases, labor expenses and performance expenses. Each event that happens is recorded, then it becomes the basis for the financial reporting made by the firm at the year end. Lot of people claim that this kind of accounting may not perfectly show a firms position, because it is tough to allocate financial value to intangible assets. These may be like a positive public image, employee satisfaction, big customer base and other hard to calculate assets.
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