Financial accounting means a specific field of accounting considering data recording, general conclusion and statements about all the financial operations made by the enterprise over a particular time period.
Financial accounting serves the purposes of external analysis of the financial standing of enterprises based on data from public and statistical reporting. A range of indicators for managerial, financial and production analysis, is used to determine its activities. By the way, financial accounting can be applied both in state and private economic sectors.
Essence of Financial Accounting
In financial accounting, certain principles should be brought into requisition. These rules depend on statutory and reporting requirements that enterprises are obliged to meet.
The data presented in documents have to be:
- clear, or to give a sufficient idea of the company's activities;
- material, or to evaluate the results of a completed work;
- reliable, or to be presented without errors, distortions and deviations from the truth;
- comparable, or to determine the efficiency of an enterprise.
A purpose of financial accounting is to consolidate information about the enterprise's activities as a whole. Moreover, it provides access to financial data for investors, economists, managers, and owners, in order to make economic decisions.
Financial accounting details present the basis for financial statements, which include the following reports: balance sheet, profit and loss statement, summary on accounts payable and receivables, cash flow statement, summary data on wages, reports for shareholders, financial analysis, inventory and etc.
In fact, financial accounting comprises the declaration of the company's assets and liabilities, as well as income and expenses, current obligations, and sources of funding. For instance, publicly traded corporations are obliged to keep a record of these documents due to the GAAP or, in other words, Generally Accepted Accounting Principles. The above-mentioned rules are accepted by the Securities and Exchange Commission, and operate in a majority of states.
Methods of Financial Accounting
It’s notable that calculations in the documents can be made by the aid of such methods as accrual, cash, or a mix of two.
Accrual accounting anticipates recognition of income and expenses, where the results of business transactions are recognized upon their completion, regardless of the actual time of receipt and payment of funds.
Alternatively, cash accounting presupposes revenue recognition on the day of direct receipt of financial facilities to the bank accounts and (or) to the company's cash desk. Expenses are discerned as payment upon arrival.
It is important to distinguish that not only revenue is taken into account, but also costs. The cash method is more convenient, anyway, the accrual one reflects the real economic situation more accurately. For instance, small-scale enterprises and unsophisticated business models are advised to apply the cash method, whilst the accrual accounting is more complicated, but at the same time universal.
Comparison of Managerial and Financial Accounting
There is no doubt that managerial accounting differs from financial one. In fact, the first is not regulated by law, and it is used in order to make management decisions promptly to improve the enterprise financial performance in the current period and in perspective.
So that the key objectives of managerial accounting are:
- providing the officer with data, considering the effectiveness of attracting funds and operating enterprise’s resources;
- preparing of recommendations for the future based on the analysis;
- providing operational information about the business situation.