Meaning and definition of Financial Accounting
Financial accounting refers to reporting of the financial position and performance of a firm by the way of financial statements issued to external users on intervallic basis. As explained by Investopedia, the main difference between financial and managerial accounting is that financial accounting is intended to provide info to parties outside the organization, while managerial accounting info is intended to help managers within the organization take decisions.
Since external financial statements are used by a large number of people in numerous ways, financial accounting features common rules known as generally accepted accounting principles (GAAP) and accounting standards. Financial accounting is, therefore, a specialized branch of accounting which keeps a track record of the financial transactions of a company.
Graphic definition of Financial Accounting
The accounting equation, Assets = Liabilities + Owner’s Equity, and financial statements are the key topics included in financial accounting. There are certain accounting standards which are helpful in determining the format of different financial accounts. Financial accounting provides a picture of the income and expenditure for the company in addition to the summary of its assets, liabilities, and owners’ or shareholders’ equity on the date of creation of accounts.
The following diagram is presented for a better explanation of financial accounting:
0 = Dr Assets Cr Owners' Equity Cr Liabilities
. _____________________________/\____________________________ .
. / Cr Retained Earnings (profit) Cr Common Stock \ .
. _________________/\_______________________________ . .
. / Dr Expenses Cr Beginning Retained Earnings \ . .
Thus -- Crediting a credit & Debiting a debit --> account increases its absolute value (balance).
Thus -- Debiting a credit & Crediting a debit --> account decreases its absolute value (balance).
Basic concepts in Financial Accounting
The financial accounts are produced on the basis of GAAP of the respective country. In some specific cases, financial accounts are required to be prepared as per the IFRS (International Financial Reporting Standards).
Objectives of Financial Accounting
The main purposes served by financial accounting include:
- creating general purpose financial statements
- creating info used by a business entity’s management for decision making, performance evaluation, and planning
- creating financial statements for fulfilling regulatory requirements
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- Debt ratios
- Liquidity ratios
- Profitability ratios
- Asset management ratios
- Cash Flow Indicator Ratios
- Market value ratios
- Financial analysis
- Business Terms
- Financial education
- International Financial Reporting Standards (EU)
- IFRS Interpretations (EU)
- Financial software