What Is Financial Accounting?

what is financial accounting

Financial Accounting refers to the process of recording, summarizing, and reporting an organization’s business transactions with the help of financial reports or statements during an accounting period. Financial accounting professionals must have a degree and experience in the financial field to gain a position as a financial accountant in a company.

These statements include: 

  • the income statement
  • the cash flow statements
  • the balance sheet 
  • the statement of retained earnings

This article covers: 

What Is the Difference Between Accounting and Financial Accounting? 

All the financial transactions and financing activities of a company come under ‘Accounting.’ A well-established accounting department must have accounting practices based on accounting rules, policies, and procedures for expenses, data management, and financial reporting. 

Financial Accounting manages the reports whether they depend on accurate data and follow “Generally Accepted Accounting Principles” (GAAP).

What Are the Four Basic Financial Statements? 

Financial Statements of financial accounting are as follows: 

1. THE INCOME STATEMENT :

An Income Statement is an organization’s total compensation or income for a specific period of time. It is the net income of a company, excluding the total expenses. The income statement also refers to the  “Profit and Loss Statement.” 

2.THE BALANCE SHEET :

Accountants prepare an accounting report or a balance sheet that presents what an organization possesses (its 

“resources”) and owes (its “liabilities”) including a particular date and its investors’ equity. 

Resources include: 

  • Cash 
  • Prepaid Expenses 
  • Accounts Receivable 
  • Notes Receivable (cash owed to the organization inside one year) 
  • Stock 
  • Investments  (real estate) 
  • Building  
  • Equipment and machinery
  • Vehicles 
  • Immaterial assets (for example, licenses) 

Liabilities include: 

  • Accounts Payable 
  • Credits Payable 
  • Notes Payable (cash the organization owes within a year) 
  • Unearned Revenue (an item or administration a customer has paid for; however, the organization has not yet given) 
  • Conceded Tax 
  • Current Taxes 
  • Finance (owed however not yet paid) 
  • Warranty Obligations 
  • Home loans 

Investors’ Equity include:

  • Stocks (common and preferred stocks) 
  • Retained Earnings (cash to be put once more into the business) 
  • Comprehensive Income (profit or loss in a company’s investments during a particular time-frame) 

Balance sheet shows:

 Assets = Liabilities + Shareholders’ Equity

3.THE CASH FLOW STATEMENT :

The cash flow statement presents the details of a company’s income and obligations (debts) throughout a particular timeframe. It only deals with cash while discluding the depreciation and other costs.

It reflects the company’s short-term viability by demonstrating whether it has enough working capital to pay its workers and debts. 

4.STATEMENT OF RETAINED EARNINGS :

It is the measure of earnings an organization has left over after the stockholders receive their profits.

Why Is Financial Accounting Important? 

Financial accounting is important because of the following: 

Financial Accounting Is Essential By Law :

Registered companies legally require the balance sheet, accounting report, income statement, and cash flow statement. The company’s annual report usually has these statements.

Financial Accounting Statements Circulates Externally : 

Financial reports are frequently referred to by people both inside and outside an organization, including: 

  • The Management

These statements let an organization’s administration investigate cash issues and do future planning. 

  • Investors

Investors decide to invest in a business by looking at its financial reports.

  • Auditors 

In case the organization is under an IRS audit, at that point, auditors will begin their investigation with these statements. 

  • Lawyers 

In case of any legal action, the legal counselors then analyze the information. 

  • Suppliers 

Suppliers must know the company’s financial condition to ensure that the payment will be on time. 

  • Banks 

On requesting a loan from the bank, it may ask for financial statements from a company. A company can show its financial statements to ensure that it is capable of returning loans on time.

Registered companies need to show their financial statements, whereas private companies do not need to show their financial statements outside the organization.

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