Profit is the soul for every business. Thus, Financial accounting should always be in the forefront for all those running business. Financial accounting and reporting is the key of any business in which, it is the procedure of compiling financial statements.
This is utilized by the companies to reflect their companyâ€™s performance. From small to big, every company appoints a financial analyst to document the work analysis to people within and outside- like investors, customers or suppliers. Financial accounting is often confused with managerial accounting but is way different.
What is Financial statement?
Most companies prepare a report called financial statement which shows the quarterly functioning in form of: income statement, balance sheet, cash flow statement and the statement of retained earnings.
- Income statement: The other name for income statement is Profit/Loss statement. This focuses on a specific time period such as a quarter or even a year. An income statement covers up net income as:
- Balance sheet: This sheet is full of details like assets and liabilities which is generated in the ending phase of every accounting period. Assets are at first calculated:
Assets= Liabilities + Equity of Stakeholdersâ€™
- Cash flow statement: It reflects all cash in and out of the organization in a time period. It shows all the account activities including operations, investments and finances.
- Statement of preserved earnings: It consists of the dividends paid from the income which is covered in a specified time. These dividends are given to the shareholders and the earnings are kept.
The basic concepts of financial accounting
The most crucial concept in financial accounting is the â€œdouble-entry accounting methodâ€. Using this method each financial transaction is shown in two accounts in form of debit and credit in separate accounts.
Here Debit is entered as a transaction on the left side, while Credit is entered as a transaction on the right side. A debit is maintained as a transaction which increases as well decreases some accounts. Same way credit also refers to increase and decrease in some accounts.
Fundamentals related to Financial accounting
The primary use of financial accounting is counted as the companyâ€™s progress report. It consists of base rules such as accounting standards or GAAP (generally accepted accounting principles).
GAAP is considered to be the base of concepts and principles that are needed to practice relevant accounting operations. However, these rules are not static, still includes most of the complex standards to respond to complicated business-related issues.
In a growing nation like India, MoCA (Ministry of Corporate Affairs) notifies the financial standards for accounting. MoCA has a separate set of guidelines that are linked with the IFRS (Indian Financial Reporting Standards).
How does financial accounting reach its goal?
The primary statements created by financial accounting standards board consists of-balance sheet, income statement and cash flow statement. These reports give the clear picture of about the work performance by the business within a particular period. And because of these numbers stakeholders may know about the financial position of the company.
The prime objective of these financial accounting statements is to facilitate value of the company by stakeholders, investors, suppliers, etc. International Financial Reporting Standards states that financial accounting is the only procedure that gives an idea about business organization. This information is highly utilized for the existing and the potential investors or lenders in the resource provision to the organization.
Financial accounting vs managerial accounting
Itâ€™s a very common confusion when it comes to accounting, about the difference in financial and managerial. Financial aggregation is all about aggregation of account details into financial statements. On the other hand, managerial accounting is details and activities about the business transactions. Both accounting standards also have separate certifications and courses for analysts and accountants to follow.
Professional accountants with the designation like Certified Public Accountant are trained in financial accounting. Apart from this discussion, Certified Management Accountant designation is taken by professionals in managerial accounting.
Last but not the least, the payouts are higher in financial accounting compared to the managerial accounting.
The final stage: Financial vs Cost accounting
The differences are because of the operations of accounting standards in various accountings. The fine line of difference is created between finance and cost accounting because of the following four characteristics:
- Data usage
Financial accounting is purely based on the position and the profit earned by the company in a specified timeline. The basic nature of this type is associated with the historical data and can controlled by the GAAP.
On the other side of the page, Cost accounting is associated with the allocation of both past and present records. Cost accounting follows those standards that focus on qualitative aspects of the records. Therefore, we can say that this is an internal tool which calculates the cost of production. This helps the analysts and the managers to design cost reduction ideas.
Thus, Financial accounting is the basis to represent the wider idea of a business other than statements. It consists of reports which are an outline of any company to stockholders. It is just one of the big sectors of accounting that represents the profit picture in business accounting. Hence, with this accounting practice, a single report is generated at the end of every financial year and are audited by the statutory auditors.