Financial accounting

Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of financial statements available for public use. Stockholders, suppliers, banks, employees, government agencies, business owners, and other stakeholders are examples of people interested in receiving such information for decision making purposes.
Financial accountancy is governed by both local and international accounting standards. Generally Accepted Accounting Principles is the standard framework of guidelines for financial accounting used in any given jurisdiction. It includes the standards, conventions and rules that accountants follow in recording and summarizing and in the preparation of financial statements.
On the other hand, International Financial Reporting Standards is a set of passionable accounting standards stating how particular types of transactions and other events should be reported in financial statements. IFRS are issued by the International Accounting Standards Board. With IFRS becoming more widespread on the international scene, consistency in financial reporting has become more prevalent between global organizations.
While financial accounting is used to prepare accounting information for people outside the organization or not involved in the day-to-day running of the company, managerial accounting provides accounting information to help managers make decisions to manage the business.


Financial accounting and financial reporting are often used as synonyms.
1. According to International Financial Reporting Standards: the objective of financial reporting is:
To provide financial information that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the reporting entity.

2. According to the European Accounting Association:
Capital maintenance is a competing objective of financial reporting.

Financial accounting is the preparation of financial statements that can be consumed by the public and the relevant stakeholders. Financial information would be useful to users if such qualitative characteristics are present. When producing financial statements, the following must comply:
Fundamental Qualitative Characteristics:
Enhancing Qualitative Characteristics:
' Three components of financial statements

Statement of [cash flows">:en:Cash flow statement">Statement of [cash flows]

The statement of cash flows considers the inputs and outputs in concrete cash within a stated period. The general template of a cash flow statement is as follows:
Cash Inflow - Cash Outflow + Opening Balance = Closing Balance
Example 1: in the beginning of September, Ellen started out with $5 in her bank account. During that same month, Ellen borrowed $20 from Tom. At the end of the month, Ellen bought a pair of shoes for $7. Ellen's cash flow statement for the month of September looks like this:
Example 2: in the beginning of June, WikiTables, a company that buys and resells tables, sold 2 tables. They'd originally bought the tables for $25 each, and sold them at a price of $50 per table. The first table was paid out in cash however the second one was bought in credit terms. WikiTables' cash flow statement for the month of June looks like this:
Important: the cash flow statement only considers the exchange of actual cash, and ignores what the person in question owes or is owed.

Statement of profit and loss">Income statement">Statement of profit and loss (income statement or statement of operations)

The statement of profit or income statement represents the changes in value of a company's accounts over a set period, and may compare the changes to changes in the same accounts over the previous period. All changes are summarized on the "bottom line" as net income, often reported as "net loss" when income is less than zero.
The net profit or loss is determined by:
cost of goods sold
– selling, general, administrative expenses
– depreciation/ amortization
= earnings before interest and taxes
– interest and tax expenses
= profit/loss

Statement of financial position">Balance sheet">Statement of financial position (balance sheet)

The balance sheet is the financial statement showing a firm's assets, liabilities and equity at a set point in time, usually the end of the fiscal year reported on the accompanying income statement. The total assets always equal the total combined liabilities and equity in dollar amount l. This statement best demonstrates the basic accounting equation: Assets = Liabilities + Equity. The statement can be used to help show the status of a company.
Accounting standards often set out a general format that companies are expected to follow when presenting their balance sheets. International Financial Reporting Standards normally require that companies report current assets and liabilities separately from non-current amounts.
Current assets are the most liquid assets of a firm, which can be realized in 12 months period. Current assets include:
Non-current assets include fixed or long-term assets and intangible assets:
Liabilities include:
Owner's equity, sometimes referred to as net assets, is represented differently depending on the type of business ownership. Business ownership can be in the form of a sole proprietorship, partnership, or a corporation. For a corporation, the owner's equity portion usually shows common stock, and retained earnings. Retained earnings come from the retained earnings statement, prepared prior to the balance sheet.

Statement of retained earnings">Statement of Retained Earnings">Statement of retained earnings (statement of changes in equity)

This statement is additional to the three main statements described above. It shows how the distribution of income and transfer of dividends affects the wealth of shareholders in the company. The concept of retained earnings means profits of previous years that are accumulated till current period. Basic proforma for this statement is as follows:
Retained earnings at the beginning of period
+ Net Income for the period
- Dividends
= Retained earnings at the end of period.'''

Basic concepts

THE STABLE MEASURING ASSUMPTION One of the basic principles in accounting is “The Measuring Unit principle:
The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.”

Historical Cost Accounting, i.e., financial capital maintenance in nominal monetary units, is based on the stable measuring unit assumption under which accountants simply assume that money, the monetary unit of measure, is perfectly stable in real value for the purpose of measuring monetary items not inflation-indexed daily in terms of the Daily CPI and constant real value non-monetary items not updated daily in terms of the Daily CPI during low and high inflation and deflation.
UNITS OF CONSTANT PURCHASING POWER The stable monetary unit assumption is not applied during hyperinflation. IFRS requires entities to implement capital maintenance in units of constant purchasing power in terms of IAS 29 Financial Reporting in Hyperinflationary Economies.
Financial accountants produce financial statements based on the accounting standards in a given jurisdiction. These standards may be the Generally Accepted Accounting Principles of a respective country, which are typically issued by a national standard setter, or International Financial Reporting Standards, which are issued by the International Accounting Standards Board.
Financial accounting serves the following purposes:
Objectives of Financial Accounting
The accounting equation and financial statements are the main topics of financial accounting.
The trial balance, which is usually prepared using the double-entry accounting system, forms the basis for preparing the financial statements. All the figures in the trial balance are rearranged to prepare a profit & loss statement and balance sheet. Accounting standards determine the format for these accounts. Financial statements display the income and expenditure for the company and a summary of the assets, liabilities, and shareholders' or owners' equity of the company on the date to which the accounts were prepared.
Assets and expenses have normal debit balances, i.e., debiting these types of accounts increases them.
Liabilities, revenues, and capital have normal credit balances, i.e., crediting these increases them.
0 = Dr Assets Cr Owners' Equity Cr Liabilities
. _____________________________/\____________________________ .
. / Cr Retained Earnings Cr Common Stock \ .
. _________________/\_______________________________ . .
. / Dr Expenses Cr Beginning Retained Earnings \ . .
. Dr Dividends Cr Revenue . .
\________________________/ \______________________________________________________/
increased by debits increased by credits
Crediting a credit
Thus -------------------------> account increases its absolute value
Debiting a debit
Debiting a credit
Thus -------------------------> account decreases its absolute value
Crediting a debit
When the same thing is done to an account as its normal balance it increases; when the opposite is done, it will decrease. Much like signs in math: two positive numbers are added and two negative numbers are also added. It is only when there is one positive and one negative that you will subtract.

Financial accounting versus cost accounting

  1. Financial accounting aims at finding out results of accounting year in the form of Profit and Loss Account and Balance Sheet. Cost Accounting aims at computing cost of production/service in a scientific manner and facilitate cost control and cost reduction.
  2. Financial accounting reports the results and position of business to government, creditors, investors, and external parties.
  3. Cost Accounting is an internal reporting system for an organisation's own management for decision making.
  4. In financial accounting, cost classification based on type of transactions, e.g. salaries, repairs, insurance, stores etc. In cost accounting, classification is basically on the basis of functions, activities, products, process and on internal planning and control and information needs of the organization.
  5. Financial accounting aims at presenting ‘true and fair’ view of transactions, profit and loss for a period and Statement of financial position on a given date. It aims at computing ‘true and fair’ view of the cost of production/services offered by the firm.

    Related qualification

Many professional accountancy qualifications cover the field of financial accountancy, including Certified Public Accountant CPA, Chartered Accountant.