About Financial Accounting
Definition: Financial accounting (or financial accountancy) is a specialized branch of accounting that keeps track of a company’s financial transactions. In other words, financial accounting is a way of reporting business activity and financial information to investors, creditors, and other people outside the business organization. Financial accounting has common rules known as accounting standards and as generally accepted accounting principles (GAAP).
Financial accountancy is governed by both local and international accounting standards. It includes the standards, conventions and rules that accountants follow in recording and summarizing and in the preparation of financial statements.
Investors and creditors are often called external users because they are people outside of the organization who use the company financial information to make decisions. The most common form of financial information issued to external users by companies is a general purpose set of financial statements.
The main objective of financial accounting is to showcase an accurate and fair picture of the financial affairs of the company. To understand the fundamentals of financial accounting well, first, we should start with double entry system and debit & credit, and then gradually should understand journal and ledger, trial balance, and four financial statements.
- Double Entry System
- Trial Balance
- Financial Statements
Financial Statements –
There are four basic financial statements used in the corporate world to show a company’s financial performance:
1. The income statement (also called the profit and loss statement) covers a specific period of time (such as a quarter or a year).
On an income statement, Revenues – Expenses = Net Income.
In accordance with the Generally Accepted Accounting Principals (GAAP), revenue is always recorded in the period of the sale of the goods and services, which may not be the same period when cash is actually received.
2. The balance sheet is a statement of assets and liabilities at the end of an accounting period. In other words, the balance sheet is a financial snapshot at a specific point in time.
On a balance sheet, Assets = Liabilities + Stockholders’ Equity.
Stockholders’ equity is the amount of financing provided by operations (retained earnings not distributed to stockholders) and by stockholders who reinvest through the contributed capital.
3. The cash flow statement shows the actual flow of cash into and out of a company over a specific period of time, in contrast to the net income on the income statement, which is a non-cash number.
A cash flow statement shows cash flows from operating activities, investing activities, and financing activities.
4. The statement of retained earnings covers a specific period of time and shows the dividends paid from earnings to shareholders and the earnings kept by the company.
Financial accounting may be performed using either the accrual method, cash method or a combination of the two. Accrual accounting entails recording transactions when the transactions have occurred and the revenue is recognizable. Cash accounting entails recording transactions only upon the exchange of cash. Revenue is only recorded upon the receipt of payment, and expenses are only recorded upon the payment of the obligation.
Many professional accountancy qualifications cover the field of financial accountancy, including Certified Public Accountant (CPA), Chartered Accountant (CA or other national designations) and Chartered Certified Accountant (ACCA).