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Financial accounting
is a dedicated branch of the accounting
that maintains all the financial transaction done by the company. Using the
standardized guidelines laid by the accounting principles these transactions
are recorded, summarized and presented in the financial report such as balance
sheet and income statement.
A financial statement is issued by the
company to its shareholders or the lenders, so it is considered an external.
Also, it tends to be widely circulated to competitors, customers, employee, and
labor organization and for investment
analysis. So actually the financial statement is not a report, with which you
report the value of a company instead,
its purpose is to provide enough information for others to assess the value of
the company.
Because of its nature, the financial
accounting is also popularly known as double entry bookkeeping. All the commercial transaction that a company makes is
recorded by using this principle of accounting. Double entry means that every transaction affects at least two accounts. For
instance, if a company borrows $50,000 from band two accounts gets affected,
first company’s cash account increases and also second
Notes payable account increases.
The double entry also means that there
are two accounts affected like the amount entered is debited and one of the reports the amount is credited. For any given
transaction the account debited should always be
equal to account credited.
Financial accounting follows the
accrual basis of accounting. Inside the accrual, basis revenues are reported
when earned not when money is received. Similarly, expenses are reported when
incurred not when paid. In this way company’s profitability, assets and
liabilities and other financial information are more in line with the reality.
Financial statement includes:
•
Income statement (also sometimes referred to profit and loss statement)
•
Balance sheet (seldom even seen
as statement of financial position)
•
Report of cash (sometimes also designated as cash flow statement)
•
Statement of stockholders equity
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