To be able to clear under what financial accounting is you will need to know the basic concepts like its definition. In simple terms, financial accounting is the defined process used when preparing financial statements. The purpose of the preparation is to highlight the company’s financial performance and position. For the company, external parties like the creditors, investors, customers, and suppliers. The explained definition gives the distinction between managerial and financial accounting. Financial accounting is the preparation of detailed reports for forecasting with managers within the company.
Companies are supposed to state for a specific period; the financial statements considered external since they issuance to different people outside the company. When the company’s stocks get publicly traded and their reports widely distributed. They reach other parties like the employees, investment analysts, and customers. It is crucial to ensure that you indicate that the purpose of the financial statements is not for reporting the company’s values. State that the intention is to offer information about the company’s value on how they access themselves.
The next step will be to differentiate the different financial statements prepared. Reports usually presented in quarterly and annual segments to be available for shareholders and the public. Four necessary reports help in knowing or showing the financial performance of any organization:
· Income Statement:
This statement is commonly known as the profit and loss statement. It gives the company performance for 3-12 months. The primary derivation of this statement is that Revenue minus Expenses gives Net Income. According to the Generally Accepted Accounting Principles, Revenue recorded the standard protocol at the period of sale. Moreover, it is most likely not in the same period as when cash is received.
· Balance Sheet:
This statement shows the assets and liabilities at the end of an accounting period. A statement illustrates all the processes and activities for a specific time. It is equated as Liabilities + Equity = Assets. Shareholder’s equity is the financial part earned from retained earnings and nor distributed to the stakeholders. The capital also contributes to it by the stockholders.
· Cash flow Statement:
The statement highlights the flow of cash in and out of a company for a specific period. It is different from the income included in the income statement, which does not include a number. The cash flow does not show the cash flows from any operating activities, like any investment or financial events.
· The Statement of Retained Earnings:
This statement is for a specific period and illustrates the dividends paid from shareholders’ earnings.
The notes to financial statements give additional information regarding the financial position of a company. There are three types of business records:
· Describing the accounting rules used in the production of the statements
· Issuing more details regarding the item on the statements
· The last note gives more information on the things not included in the financial statements.
Another aspect of financial accounting is the accounting standards. When preparing the financial statements, it is paramount and imperative to follow all the rules and legal requirements. In the United States, they adhere to the Financial Accounting Standards Board; it helps in establishing all the financial reporting and accounting. It also works and sticks with the generally accepted accounting principles. Any public trading company is supposed to use and follow all the requirements of the Securities and Exchange Commission.
When dealing with international financial reporting and statements, it is vital to adhere to the International Accounting Standards Board. It is essential to be aware of the double-entry principle in financial accounting on an accrual basis. Double-entry bookkeeping is a system used in financial accounting and all the business transactions recorded there. By double entry, it means that whenever there is a transaction, it will affect at least two accounts. When a company gets a loan from the bank, cash will increase, and their Accounts Payable.
The principle of double-entry states that whenever there is a financial transaction, the amount in question should have a debit and credit entry. The amount of the debit side and the credit side should always be equal. In case you are in school studying financial accounting, and you get stranded or confused, do not be. Homeworkdoer.org will offer all the online help you will need at an affordable cost. The main advantage of the double-entry principle is that at any given time, the company’s balance will equate assets to liability and shareholder’s equity.
When handling financial accounting, you need to adhere to the accrual basis of accounting and not the cash basis. Accrual basis will report Revenue when earned, not when cash is received. Expenses recorded when incurred, not when paid. For example, when there is an annual subscription of $36, the business owner will be reporting $3 monthly as a fraction of the yearly payment. In case of any taxes or bills, they get published as a fraction for that particular month. The importance of the accrual system is that it follows the economic reality of assets, liabilities, and profitability.
For financial accounting to be useful to the company and other external parties, the reports must possess information that is credible, understandable, and comparable against other companies. That is the reason when preparing the statements and reports to follow the generally accepted accounting principles. The principles are purely based on the approach that cost principle matches the policy, going concern, economic entity, full disclosure, relevance, reliability, and conservatism.
GAAP is not standard. It includes some complex standards that are about some complicated transactions. It addresses the accounting principles that are unique to each business industry or sector, like in banking, insurance, healthcare, and hospitality. GAAP will always change in terms of government regulations in different segments.
Financial reporting is a different concept to financial statements. It includes annual reports to stockholders and the Securities and Exchange Commission.
Apart from financial accounting, there is managerial accounting, tax accounting, auditing, and cost accounting. That is the reason it is vital to know how to differentiate the different accounting approaches. It will help in the end when issuing financial statements and reports.