Financial accounting is that branch of accountancy that seeks to keep record of the financial activities of a company using specified standards and legal requirement. At the elementary level, it is believed to revolve around ‘debiting and crediting’ items. You debit the receiver and credit the giver.
Financial accounting function includes the preparation of financial statements of a company which comprises documents like balance sheet (Statement of financial position), Profit and loss account (Statement of comprehensive income), Cash flow statement (statement of cash flow), Statement of equity, etc. Note that the phrases in bracket represent the new name given to the documents. As far as most of the contents are concerned, this is just change of name and shouldn’t bother you. Documents like; Notes to the financial Statements, Auditors report, Chairman’s report, financial forecast statement are all included in the annual report to allow you analyse, interpret and understand the accounts better.
The balance sheet indicates the financial position of the company by listing assets and liabilities of an entity. It is just a summary of different class of assets and liabilities. Broadly speaking, assets and liabilities are divided into long term and short term.
The income statement (Profit and Loss Account) which is now called statement of comprehensive income as the name implies gives account of economic activities that a business entered into during a specified period.
BASICS OF FINANCIAL ACCOUNTING (BOOKKEEPING)
The theory of double entry is at the heart of financial accounting. Two sets of accounts are directly affected by every transaction. The giver experiences a reduction in value while the receiver has the opposite effect. This might sound confusing but just have it in mind that you debit the account that receives value and credit the account that gives value.
Financial accounting starts from the time when the book-keeper engages in the process of gathering, collating, and recording economic transactions from source documents (note that a bookkeeper also know as accounting clerk or accounting technician is not an accountants). Source documents can be invoices, receipts, cheque stub, etc. The resultant of the process of bookkeeping is the production of trial balance from which the contents of financial statements that were mentioned before are produced. Don’t forget that the preparation of financial statements is done by the accountants upon the receipt of direction from the directors.
The manual process involved in the above paragraph no longer bothers most businesses as the system has been fully automated. What many bookkeepers now learn is how to manipulate the computers and other gadgets used in performing this.
CHARACTERISTICS OF FINANCIAL ACCOUNTING
One major difference between a financial accounting and other major branches of accounting (management accounting and cost accounting) is the structured architecture in place. Accounting standards and company law are the main sources of principles that govern financial accounting. Other characteristics of financial accounting that makes it different from other forms of accounting are:
TIME FRAME: financial accounting information is produced to cover activities within a specified period, usually yearly.
IT LAGS BEHIND: information that is contained in financial accounting represents what has already happened in the past. This is to say that financial accounting is historical in nature.
FINANCIAL ACCOUNTING PROVIDES INFORMATION FOR EXTERNAL USERS: users of accounting information rely on financial accounting to provide them with the needed facts and figure that they need for their decision making.
USEFULNESS OF FINANCIAL ACCOUNTING
The importance of accounting, especially financial accounting resolves around enhancing the quality of decision that we make. Both internal and external users of accounting information rely on financial accounting to provide them with information about a company that would otherwise not be available. Business analysis and fundamental analysis used for business valuation would be very difficult if not for the role of financial accounting in provided some of the information. Accounting gives us an idea of the sources of finance and how they are used in the daily activities of business.
Asking the question; what financial accounting?, is similar to asking the question; what is accounting? You don’t stop at defining the major term. An in-depth discussion has to be given so as to bring out most important facts about the subject matter. This article has taken similar approach of delving into many areas that most online article that attempts to answer the question does not touch.