Accounting is the process of recording financial transactions associated with the business. The process of analyzing, summarizing and recording the business transactions to report to the regulatory bodies, people associated with the business or its intended users is known as accounting.
Financial accounting is an important branch of accounting because it records the financial transactions to keep track of the financial position of the company. In simple words financial accounting is used to measure the performance of the business, the monetary value of its assets and the payable liabilities of the business. By using the international standards of accounting and guidelines provided by the regulatory bodies, the business transactions are recorded, summarized and presented in financial statements such as the statement of comprehensive income or a statement of financial position of the company.
The companies issue their financial statements on a routine schedule. These statements are mostly used externally because they are given to the people who are not directly involved in the company’s operations, with the main beneficiary being shareholders as well as investors. And if the company is publicly listed its financial statements are prepared and presented to the other parties as well such as competitors, its customers, employees, labor organizations, investment analysts and stakeholders of the company.
Methods of recording transaction in financial accounting
Transactions are recorded in the accounts using some basic methods which are;
- Double-entry accounting system
- Accrual basis system of accounting
Double-entry accounting system
In the double-entry accounting system, every transaction is recorded at least in two accounts. For example, if a company purchases any asset worth 1 million by cash the company’s cash account decreases and the company’s assets account will increase. The effect of double-entry on the accounts will be like one account is debited and the other account is credited and the debit amount must equal the credit amount entered in the accounts. The main benefit of double-entry accounting is that you can check at any time during the financial year the balance of the company’s assets account will equal to the balance of its liability and equity account.
Accrual basis system of accounting
In the financial accounting accrual basis system of accounting is followed which means income is recorded when it is earned not when the money is received and expenses are recorded when they are incurred not when they are paid. On the accrual basis of accounting company’s profitability, assets, liabilities and other financial information are more in line with economic reality.
When preparing accounts or making reports in the financial accounting of a company, the reports need to be credible, easy to understand and comparable to those of other companies. To make it standardize financial accounting follows a set of common rules known as International Accounting Standards (IAS) or Generally Accepted Accounting Principles (GAAP). These standards provide set down rules, regulations and set a regulatory framework to make the accounts simply and understandably.
Financial Accounting is used by almost every size of business or company to make its accounting statements which are cash flow statements, statements of comprehensive income, statement of assets and liabilities and statement of equity to record all the financial transactions and make a report on them.