What is Financial Accounting?
Financial accounting is the area of accounting that is concerned with the overall summary, examination, and reporting of the business's financial transactions. Financial accounting incorporates the development of a company's financial statements that are available for public use.
What Are The Types of Financial Accounting?
There are generally two kinds of financial accounting: cash accounting and accrual accounting. Both forms of financial accounting utilise double-entry accounting to document financial transactions accurately.
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How Does Financial Accounting Works?
Financial accounting uses the series of the set accounting principles. The choice of accounting principles to utilise during a course of financial accounting relies on the reporting and regulatory requirements which the business faces. Finance accounting leads to the determination of the net earning at bottom of the company’s income statement. Equity, liabilities and assets accounts are generally reported on a firm’s balance sheet. This balance sheet uses the financial reporting so as to report the ownership of future economic advantages of the firm.
What Are the Key Functions of Financial Accounting?
The key functions of financial accounting is to develop the financial reports which provide the information regarding the performance of the firm. This financial accounting is fundamentally utilised to convey a firm’s financial information to the external parties like tax authorities, investors, and creditors. Moreover, it enables the creditors and shareholders to determine the financial health of the firm. It aids the creditors and shareholders in the decision-making procedure since they can assess the recent status of firm and accordingly predicts its overall performance. Moreover, the financial accounting team has to satisfy the legal and fiscal requirements.
What Are The Four Fundamental Financial Statements?
The financial statements consists of four primary reports which are stated below:
- Income statement: Income statement of a firm demonstrates the profit/loss, expenditures and earnings produced during a particular reporting period. This is generally regarded the most significant financial statement as it represents the overall operating outcome of a firm.
- Statement of retained earnings: Statement of retained earnings demonstrates overall changes in the company’s equity during a particular reporting period. This is generally the least utilised financial statement and is only incorporated in an audited financial statement package.
- Balance sheet: The balance sheet demonstrates the equity, liabilities and assets of a firm as of the company’s reporting date. Balanced sheet regarded as the 2nd most significant financial statement as it gives the information regarding the capitalisation and liquidity of the firm.
- Statement of cash flows: The statement of cash flows demonstrates the cash outflows and inflows that took place during a particular reporting period. This financial statement can be represented while issuing the company’s financial statements to the external parties.
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What is the Difference Between Accrual method and Cash method?
The accrual and cash method of accounting are considered as the two distinct methods utilised to document the accounting transactions. The key distinctions between the two methods are stated below:
- Definition: Accrual method is the method of accounting where any expenditure or income is identified while it is incurred or earned, regardless of the time when it is actually collected or paid. On the other hand, Cash method is the method of accounting in which any expenditure or income is identified only at that point of time when there is the outflow or inflow of the cash.
- Accuracy: Accrual method is generally more accurate and reliable than the cash method of accounting.
- Suitability: Accrual method is mainly suitable for the large size corporations whereas cash method is suitable for small to micro size businesses.
- Nature: Accrual method is generally complex in nature when compared to the cash method.
- Accounting framework followed: Accrual method generally follows the double entry framework of accounting in which every transaction has 2 results in the form of either credit or debit. On the other hand, cash method follows single entry framework which documents either outflow or inflow of cash.
What is the Difference Between Financial Accounting and Managerial Accounting?
The major distinctions between managerial accounting and financial accounting are stated below:
Purpose: The key purpose of financial accounting is to reveal the end outcomes of a firm and firm’s financial situation on a specified date. On the other hand, the key purpose of managerial accounting is to enable the firm’s management by giving information which is utilised to plan, fix targets and assess these targets.
Segment reporting: Financial accounting pertains to the whole firm. Some figures might be distributed for materially crucial business units Managerial accounting pertains to single department of the firm in addition to the whole firm.
Users: The information and data generated by the financial accounting is utilised by the outer parties like investors, lender and shareholders. On a contrary, reports generated by managerial accounting is utilised by the internal users like employees and managers.
Focus: Financial accounting emphasis on the history and reports on prior year or quarter. On the other hand, managerial accounting emphasis on present and predicts for upcoming period.
Rules: In case of financial accounting, rules which are prescribed by the standard like IFRS or GAAP. There are generally legal requirements for the firms to follow the financial accounting standards. On the other hand, managerial accounting reports are generally utilised internally in the firm and so they are not liable to the legal requirements.
What is the Difference Between Accounting and Financial Accounting?
Accounting and financial accounting are not similar to each other. Accounting is recognising, documenting and communicating the economic outcomes of the firm. A major function of accounting for a business is to measure the business activities, process the information into appropriate reports and then communicate the outcomes to the firm’s decision-makers. It is a vast concept which have various fields of specialisation like managerial accounting, cost accounting and financial accouting. On the other hand, financial accounting is a kind of accounting in which certain financial statement and information are produced that are generally utilised by external users only.
What is the Importance of Financial Accounting?
Financial accounting is quite important for a business as it enables them to monitor their overall financial transaction within a particular financial period. In turn, the business owners and managers can make viable and effective decisions with regards to the ways in which the firm’s resources should be allocated. Furthermore, it enables the businesses to convey their overall business finances to the external users like investors and creditors.
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