Financial Accounting

Financial accounting is also known as financial accountancy is the one of the major fields of accounting that is associated with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of monetary and financial statements of the business organization. It uses the information that is available for public. The people who are interested in gaining this kind of information are entrepreneurs, banks, employees, stockholders, suppliers, business owners, and other stakeholders, government agencies. This information is used for different decision-making purposes.

In a business organization, the financial accounting is governed from both the international as well as local accounting standards. Generally Accepted Accounting Principles (GAAP) is one prominent framework that offers special guidelines and instructions for financial accounting. GAAP consists of certain conventions, standards, and rules that all accountants have to follow for recording and summarizing financial transaction of the company. GAAP principles are very useful for the accurate preparation of all kind of financial statements.

International Financial Reporting Standards (IFRS), on the other hand, is another set of accounting principles and standards. These standards states how different types of transactions and important events should be summarized and reported for the accurate preparation of the financial statements. International Financial Reporting Standards are issued by one special department and that is International Accounting Standards Board (IASB). The International Financial Reporting Standards has become widespread on the international level. This has also brought the consistency in reporting and summarizing the financial transactions.  Now it is prominent among global organizations.

When it comes to preparing accounting information using financial accounting for public or people who are not the part of the organization then managerial accounting is used. This provides important accounting information which enables managers to make smart decisions for the effective management of the business. Business Data Analysis do offer insights regarding your company's ways of handling wide aspect of information.

Objectives of Financial Accounting

Financial report and financial accounting are synonymous to each other. In the terms of International Financial Reporting Standards: The financial accounting is used to provide important information to the potential investors, creditors, lenders, etc. This helps in making resourceful decisions to the entity.

As we all know that financial accounting is associated with the preparation of monetary transactions and statements. This information is utilized by the public and the important stakeholders. It is imperative that the all the information provided by the financial accounting should be useful for the users. There should be some qualitative features present in them. While constructing financial statements, the following are the things that must comply.

Fundamental Qualitative Features of Financial Accounting:

Relevance: This is the capacity of the provided information to impact the decision-making process of users. The relevance is important ingredient which is further categorized into the confirmatory value and predictive value. The sub-category of relevance is materiality. Information is the prime material. If there is misstatement, then it could significantly influence the economic decisions based on the financial statements.

Faithful Representation: Another characteristic of financial accounting is faithful representation. This means that actual effects of the transactions should be accurately accounted reported in the monetary statements. It is important that all the words and numbers should match what actually happened with the transaction. The faithful representation is the feature that consists of neutrality, completeness, and free from mistakes and error.

Financial Statements

Most of the business organizations maintains the annual and quarterly financial statements. This is important for the shareholders and the public who is ready to invest. There are majorly 4 kind of financial statements that are utilized by corporate businesses. These statements are used for analyzing the financial performance of the organization:

The income statement which is also known as the profit and loss statement. These are prepared for the certain period of time. It can be quarterly or yearly. Here is the formulation for that:

Net Income = Revenues – Expenses

The guidelines of GAAP (Generally Accepted Accounting Principles) the revenue is recorded in the time period of the sales. This might not be the same period when cash is actually collected.

The second major statement is balance sheet. This tells about the assets and liabilities counted at the end of accounting period. In more concise words we can say that balance sheet provides complete financial picture of the company within the specific period in time.

The balance sheet works with this formula: Assets = Liabilities + Stockholders’ Equity.

The equity of stockholders is the amount of finance earned by operations (the maintained earnings are not distributed by stockholders). The stakeholders can easily reinvest by contributed capital.

The cash flow statement reflects the flow of cash. The cash keep going in and out of the business organization. It studies the cash flow statement for the specific period of time. In comparison to the net income accordance of income statement. This is a non-cash number.

The cash flow statement depicts flows of cash from operating and investing measures. This includes other kind of financing activities.

The statement of employed earnings encompasses the certain period of time. This contains the dividends coming from shareholders earnings. These earnings are managed by the company.

Financial statements must meet the requirement of the accounting standards. If we talk about the United States, the Financial Accounting Standards Board (FASB) is responsible for the managing the reporting standards and financial accounting. The reporting standards works according to the generally accepted accounting principles. It is also important for the publicly traded companies to obey the the requirements of the Exchange and Security Commission.

The International Accounting Standards Board (IASB) is liable to develop the internationally accepted financial reporting standards. IASB and FASB have standard that might work differently in some sectors. The movement occurs underway to meet the standards. This make accounting across boundaries easier in a world of increasingly international commerce.

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