Financial accounting is a branch of accounting that focuses on recording, analyzing, and reporting on a company’s business transactions to generate statements used by internal and external shareholders to assess the company’s financial stability. Financial Accounting is essential for businesses because it allows them to keep track of their financial transactions. As a result, they can make informed decisions about how to allocate their resources. Furthermore, financial accounting enables you to communicate your company’s finances to third parties such as creditors and investors.
Financial Accounting Meaning
Financial accounting is the process of preparing financial statements used by businesses to demonstrate their financial performance and position to people outside the company, such as investors, creditors, suppliers, and customers.
The following are the four basic financial statements used in financial accounting:
(1) Balance sheets– It shows what a company owns and what it owes. A balance sheet is a detailed statement of a company’s assets, liabilities, and shareholders’ equity. The following formula summarizes what a balance sheet shows:
ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY
Assets are things that a company owns that have value.
Liabilities are amounts of money that a company owes to others
Shareholders’ equity is sometimes called capital or net worth. It’s the money that would be left if a company sold its assets and paid off all of its liabilities.
A company’s assets have to equal, or “balance,” the sum of its liabilities and shareholders’ equity.
(2) Income statements– It shows how much money a business made and spent over time.
(3) Cash flow statements– It depicts money flow between a company and the outside world over time or the company’s inflows and outflows of cash.
(4) Shareholder equity statements– It depicts changes in the company’s shareholders’ interests over time.
Financial Accounting Course
Financial Accounting teaches key accounting concepts and principles that will illuminate financial statements and provide critical insights into business performance and potential. By the end of the Financial Accounting course, you’ll be able to read the three most common financial statements: the income statement, balance sheet, and statement of cash flows. Then you can apply these skills to a real-world business challenge.
Financial Accounting and Management Accounting
Management accounting is a method of providing financial information and resources to managers to aid in decision-making. The only distinction between management accounting and financial accounting is that management accounting is used exclusively by the organization’s internal staff. In this procedure, the finance administration shares financial information and reports, such as invoices and financial balance statements, with the company’s management team.
Q1. What do you understand by Management Accounting?
Ans. Management accounting, also known as managerial accounting, provides accounting information to business managers for them to make informed business decisions and improve their management and control responsibilities.
Q2. What do you understand by Financial Accounting?
Ans. Financial accounting is the process of preparing financial statements used by businesses to demonstrate their financial performance and position to people outside the company, such as investors, creditors, suppliers, and customers.
Q3. What are the basic financial statements used in financial accounting?
Ans. The four basic financial statements are the income statement, balance sheet, statement of cash flows, and statement of retained earnings.