Financial Accounting is that branch of accounting in which reporting, summarizing and recording of transactions takes place in order to provide an accurate and complete picture of financial position of the company. The financial position of the company on a specific date and for a specific period is determined by preparation of quarterly and annual financial statements namely, cash flow statement, profit and loss account statement and balance sheet. The financial statements are prepared in compliance with Generally Accepted Accounting Principles (GAAP). The international accounting standards in United States of America are maintained by Financial Accounting Standards Boards.
Accounting is required because it paves the path for business to flourish and grow. Accounting helps to know, assess and determine the true results of the business. The primary objective of financial accounting of a business is to give the owners of the business and to outsiders the financial analysis and snapshot i.e., about the profit and loss, solvency and liquidity position of the company. Also, if anyone desires to make any sort of forecasts about the financial performance of the company then it has to be based on both historic data and current data of financial statement analysis. So, data can be found is properly recoded, summarized and stored i.e., by accounting in financial statement templates.
Accounting is basically divided into two categories- financial accounting and managerial accounting: - The information that is made available to public at large is described as financial accounting i.e., shareholders, government, public, creditors, financial institutions, suppliers, etc. Managerial accounting is different from financial accounting in that the information like cost of sale, cost of production, margin on sale, etc are not made available to public at large. The reports produced in managerial accounting are submitted to divisional heads and business managers.
Assets = Liabilities + Equity
Double entry bookkeeping system means every transaction involves two accounts. It allows the accounting equation to hold good. Amounts entered as debits will have an equal amount for credit. Say, Raw material purchased on credit for $ 100. So, purchased account will be debited for 100 and creditors account will be credited by 100. This makes accounting equation hold good. Both effect of a financial transaction gets recorded. To get a complete view of company’s business it is important to follow this concept.
So for any financial transaction, in an account entry, a debit will have effect of increasing an expense or asset account, or decreasing an equity or liability account. A credit will be having the effect of increasing an equity or liability, or decreasing an expense on asset account.
Accrual Basis of Accounting: In this method of accounting, revenues are recognized at the time when they are earned and not when cash received. Here, the matching principle is followed for preparation of financial statements i.e., matching of revenues with relevant expenses i.e., expenses are not recorded at the time of payment but when they accrue. Expenses and incomes are reflected in financial statement analysis in compliance with the accrual basis of accounting i.e., whether cash has been received or not, income and expenses are to be recorded when they accrue. For example, Goods sold to party. So income recognition criteria (i.e., for amount of sales) would be – sales would be recorded and will deemed to be accrue when the risks and rewards has been transferred to buyer and ownership has been transferred, or any such clause has been fulfilled which has been clearly stated in the contract for sale say, the sale will be completed when goods are delivered to buyer’s place. The method is opted by any organization to record the financial transactions. One the method is opted it also has to be applied consistently.
Accounting is required for preparing the financial statements or report i.e., the Balance sheet, Income Statements and the cash flow statement.
Balance sheet is a financial statement on financial position of the company containing position of assets, liabilities and equity.
Income statements are also known as profit and loss statement which is a statement reflecting the net income or net profit.
Cash flow statement is a statement is a statement showing cash generated from investing, financing and operating activities of an organization. All companies listed on an exchange or a public limited company have to file or present such financial statements and financial statement analysis to regulatory board or investors. The audited financial statements should follow the international accounting stamdards of GAAP i.e., Generally Accepted Auditing Principles which are guidelines issued by the financial accounting standards board for auditing of balance sheets, cash flow statement and profit and loss statements.
GAAP ensures consistency and accuracy of auditor’s financial statement analysis and report. GAAP minimizes the probability of material misstatements or errors remaining unnoticed. Moreover, these financial statements are audited by an independent body of accountants and accounting professionals who are holding certification from a duly recognized body. Many entities or corporations are under statutory obligations to get their financial accounts audited. Audit is required to be conducted to provide assurance to the share holders or investors of the company about the accuracy and fairness of financial statements. After the conduct of audit, auditors are required to state their opinion on financial statements in the audit report.
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