Financial accounting is a branch of accounting that involves recording, analysis, summarizing, and reporting of various business transactions. The business transactions that result from the company or business operations at a specific period, usually one year.
These financial transactions are recorded in the financial statements such as the income statement, statement of cash flow and the statement of the financial position also known as a balance sheet.
When preparing the financial statements, accountants are obliged to follow the standard sets of generally accepted accounting principles (GAAP) as well as international financial reporting standards. The international public companies use, and the IFRS.
The main objective is to provide relevant information to the outside which is used by the creditors, investors, tax authorities and regulators to make viable decisions.
Financial accounting is an integral part of businesses due to helpful facts such as the following:
The financial statements provided by the company or business are useful to the external users of such information such as the suppliers, bank or the investors to compare the well-being of the company as well as the progress of the company with their financial expectations.
The internal users of the financial information comprise of the finance team and employees who are highly interested in having their compensation based on the stock. A well-presented financial statement is significant to these users. Hence financial statements should be provided in professional skills.
The financial information provided by the companies follow set international standards hence it's easy to analyze and compare as they use standardized guidelines.
Most companies provide quarterly and annual statements which are essential for the shareholders and other external users of the information. There are 4 types of financial statements which evaluates the performance of a company. They include:
Income statement is also known as the profit and loss statement. This financial statement records the company's changes over time. In the income statement, the main objective is to calculate the net income.
Net income= Revenues = Expenses
The revenues are recorded in the sales of goods and services period, which is maybe different from the cash receiving period.
This is the statement of the financial position of assets and liabilities at the end of the accounting period.
Assets= Liabilities + Equity
This is a record of the inflow and outflow of cash in a company at a specific period. The activities involved in cash flow statements are operating, investing and financing activities.
This statement of financial accounting records the dividends that have been paid to the shareholders as well as the earning balance that has been kept by a company.
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