Embark a journey through various steps in the accounting process for Businesses
Financial accounting is a specialized branch of accounting that particularly refers
to financial statements that are prepared for stakeholders like customers, government,
shareholders and banks etc. By giving transparent track of work of a company it is
determined that what is current position of the company. It is very important tool in
decision making which leads to further managerial policies.
Major concepts of financial accounting:
1. Financial statements
Financial accounting provides records in one of the three types of financial statements.
These statements are: cash flow statement, balance sheet and income statement. These
statements are prepared by double-entry accounting method. Every statement must meet
standards of accounting such as transparency, comparability, usefulness and relevance.
2. Debits and credits:
Debits and credits are types of accounts that must balance each other for accurate
accounting records. They are maintained by double-entry accounting system, which is the
most accurate of all the accounting systems. Debits are entered on the left side of the
ledger and credits are entered on the right side of the ledger journal.
3. Equation of accounting:
The fundamental equation that is the base of double-entry accounting system in financial
accounting is known as accounting equation. It's general form is:
It is clear statement of the fact that assets of any company are result of stakeholders'
equity and liabilities. Above equation implies to public company while for non-public
company the term stakeholders' equity is replaced by owners' equity.
4. Generally accepted accounting principles (GAAP):
These are the set of rules that are must in checklist of bookkeeping. It is proper
guidance for recording any information regarding business transactions. These rules
include cost principle, matching principle, full disclosure principle and many other.
5. Accrual and cash method:
This is the means of keeping records. Companies may keep track of their income by either
accrual method or cash method. In cash method expense is recorded on the time of cash
payment and revenue is recorded when received from customers. While in accrual method
expense is recorded when it is incurred and revenue is recorded when it is earned without
any consideration of cash. Accrual method is preferable to public companies in accordance
with GAAP.
Financial accounting process:
It is the series of steps that eventually leads to development of financial statements
and financial reports. At the initial stage transactions are identified and analysed.
Analysed transactions are then recorded into accounts present in a register which is
later transferred to general ledger which contains a complete record of all the
transactions. In next step entries are adjusted and previous entries are closed.
Finally trial balance is prepared to detected any error and propose correction which
leads to a fine financial statement.
As a whole financial accounting is reflection of company’s performance that is
characterized by financial statements that are validated by GAAP.