Basic concepts of Financial Accounting
Accounting is an information system that measures business activities, processes information and communicates financial information. Financial Accounting is accounting concerned with summary, analysis and reporting of financial transactions. Financial accounting is prepared to determine profitability & financial position of a concern for a specific period of time. The American Institute of Certified Public Accountant has defined the Financial Accounting as, "The art of recording, classifying and summarizing in a significant manner and in terms of money transaction or event which in part, at least of a financial character, and interpreting the result thereof". Financial Accounting is governed by both local as well as international accounting standards. These standards state how a particulars type of transaction and other event should be reported in the financial statement. Generally accepted accounting principles i.e. GAAP, international financial reporting standard i.e. IFRS are some examples of these accounting standards. The Financial Accounting has various objectives some of which are mentioned below -
The key objective of Financial Accounting is to keep record of monetary transactions in a systematic manner. These transactions are further classified and summarized logically for preparation, analysis and interpretation.
Ascertain the result of the recorded transaction i.e. profit or loss for a particular period of time. It helps the management and stakeholder in taking decision. If the business is not profitable then identifying the area of such affairs and taking steps accordingly.
Ascertain the financial position of the organization on a particular date not only in terms of profit & loss but also in terms of debtors &creditors, assets &liabilities i.e. what it owes to the outsiders and what it owns.
Ensure accounts are prepared according to the accepted accounting concepts and convention.
Provide financial information of the reporting entity which is useful full to the existing and potential investors, lenders and creditors in making decision.
Through financial accounting, creditworthiness of an organization can be ascertained. This helps the firms in obtaining investment from investors, financial institutions and banks.
Importance of Financial Accounting in Academics
Recording of transactions - Financial Accounting is important in recording business transactions. In today's dynamic and complex business environment, it is very important to keep accounting records up to date. All the business either small or big needs to record their transactions. They use different methods of accounting to record their transactions. Financial Accounting uses double entry method for recording the transaction. In Financial Accounting, we generally prepare Income statement, Statement of financial position and Cash flow statement.
Analysis of Transactions - By analyzing Financial Accounting, we know the outflows of resources as well as its impact on the Company in long run. Through this, we can assess how much various expenses contribute to overall operation of the Company. By this analysis we can find the areas where few expenses give better profit in future.
Helps the managers in decision making - Financial Accounting assists the managers in decision making. Financial accounting focuses not only on the quantity but also consider quality factor while providing information for decision making for an organization.
Comparison with competitors - Rules of Financial Accounting are common for every enterprise. This enables them to compare their ratios with the competitor's ratios. This helps the business in various investment opportunities by which they can maximize their overall performance.
Provide information to outsiders- The most important factor of Financial Accounting is that, it provides information to the Management as well as outsiders regarding profitability and financial position of the organization for a particular period of time. This enables to form an idea about how the business is progressing. This also helps in attracting new investors.
Helps in statutory compliance - Financial Accounting enables us to record Company liabilities which need to be paid within the prescribed time according to the statutory requirement such as Provident fund, Pension fund, Vat, Sales tax etc. Hence, with the help of Financial Accounting Company makes timely payment of its statutory compliances.
Budgeting and future projections - Financial Accounting plays a significant role in budgeting part. With the help of budgeting, Company fixes the standard performance that needs to be undertaken considering its past performance. Nowaday, before starting any activity, detailed estimation of quantities and amounts are necessary for better performance. Through correct estimation, Company can compare its actual performance with its budgeted figures and can take remedial actions in time to improve its performance.
Few important tips to solve problems of Financial Accounting:
Below are some of the tips which will help in solving Financial Accounting problems -
- First, read the problem in detail to understand the type and concept of problem.
- Secondly, identify the types of company/ firm and its nature i.e. whether it is manufacturing company of trading Co. and type of business it is doing. This may not be required in all kinds of problem.
- Analysis of problem is one the most important part. Analyze the problem that is being asked so as to identify the requirement.
- Check the laws, rules, standards that are applicable to the question.
- Identify the specific scenario with relation to each situation, if any.
- Ascertain Method of Financial Accounting which needs to be used to get the correct result.
From all the above, we can safely conclude that, Financial Accounting is an integral part of a Company and it can take the decision making to the next level.
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