What is financial accounting?

What is financial accounting?

Accounting is considered the business language as it communicates an organization’s finances as a process of information and economic health. Financial accounting is a systematic process of periodically recording, analyzing and reporting a corporation’s financial transactions.

Financial accounting summarizes a company's financial transactions and reports its economic performance. The summarized financial information is presented to the top management and other relevant stakeholders through a balance sheet, cash flows, income and expenditure statements, economic forecasts, etc.

Importance of financial accounting

Financial information is available in the company in the form of ledgers, invoices, assets, liabilities, income expenditures, etc. Monetary accounting helps organizations summarize the economic data and present them to stakeholders. Monetary accounting has a lot of significance as:

Decision-making: Financial accounting helps the top leadership and other stakeholders make decisions. The top leadership can leverage accounting information to decide on the pricing, promotion, and other expenses of a product launch.

Budgeting and planning: Financial accounting help business owners allocate budgets for resources, machinery, equipment, etc. Based on the allocated budget, a business plan can be made.

Transaction recording: The main objective and significance of financial accounting is to record and maintain all financial transactions systematically.

Statutory compliance: All businesses should keep their financial records up to date and share financial reports with stakeholders. In the case of public limited companies, annual reports should be shared with shareholders. Moreover, financial accounting also helps in filing taxes and adhering to all other statutory compliances.

Financial records: Financial records help organizations maintain historic financial records. These historic records help forecast the company's future financial health. The income statement, cash flows, and financial projections help obtain funds and investments for the company.

Build a reputation for the company: When an organization deals fairly in all financial transactions and transparently discloses all financial information to its stakeholders, it builds goodwill and reputation.

Build credit: Clean financial records build a good reputation, which in turn builds credit with the creditors.

Funds and loans: A company's financial accounts disclose its financial health. Credit issuing companies follow a certain format to ascertain a company's risk. A healthy financial situation with positive relations with creditors will help a company get funds and loans from financial institutions.

Clean audits: Every company, especially public limited companies, has to undergo a third-party audit for its financial statements. By maintaining financial records, tax obligations can be met easily.

Fraud prevention: When financial documents are recorded clearly and periodically, the entire financial health is clearly depicted before the management. There won’t be any scope for fraud.

Types of Financial Accounts

Financial accounting: Financial accountants help track and record all the financial transactions in an organization. They periodically prepare income and expense statements, cash flow statements, and balance sheets.

Cost accounting: Cost accounting is prepared by cost accountants who are ICWA certified with a previous bachelor's in commerce degree. To prepare cost accountancy, a cost accountant considers direct labour, overheads, and direct and indirect materials.

Managerial accounting: Managerial accounts collect the financial statements and analyze them to create reports. These reports are presented to top management for decision-making.

Tax accounting: Tax accounting managers help individuals, organizations, and non-profit organizations comply with tax regulations.

Forensic accounting: Forensic accountants primarily investigate to find frauds and litigations in the accounts. The reports can be presented to the court of law as evidence.

Governmental accounting: Government accounting is conducted by government designated finance managers. They follow the Governmental Accounting Standards Board (GASB).

International accounting: The international accounting must adhere to International Financial Reporting Standards (IFRS).

Types of auditing

Internal auditing: Internal audits are conducted by companies' in-house accountants. Regular audits by internal auditors are recommended for fraud prevention.

External auditing: External auditing is conducted by third-party audits hired by the company for audit purposes. Financial accountants ensure that the financial statements adhere to the generally accepted accounting principles (GAAP). Forensic audits are done in case any fraud is detected, and tax accounts are conducted audits in case of tax incongruences.

Conclusion: Financial accounting is the backbone of any finance department. If you wish to understand financial accounting in depth, please enroll in our” Financial Accounting” course.