Financial accountancy 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.
1. Balance Sheet
2. P/L or Income Statement
3. Cash Flow Statement
4. Statement of Retained Earnings (or Shareholders’ Equity Statement)
In financial accounting, assets are recorded on the basis of historical costs in the balance
sheet, i.e., the assets are recorded at their original purchase price. Of course, the
depreciation on the asset is duly subtracted from its original value as the asset remains in
use of the business.
However, in financial management, book value is seldom used and financial managers
consider the market value and the intrinsic value of assets.
Market value may be defined as the value currently prevailing in the market or the value
at which the sellers are ready to sell, and buyers are ready to buy a particular asset.
Intrinsic value or the fair value is calculated by summing up the discounted future cash
flows Objective of Financial Accounting (FA):
The objective of financial accounting is to collect accurate, systematic, and timely
financial data and other financial information, and to compile and consolidate it in an
organized and systematic way, according to the principles and rules of accounting, for
reporting purpose.
The financial managers use these reports to assess the financial position of the company
through various financial management tools and then the financial position can be
compared to, or benchmarked against, the industry norms. The four different financial
statements used for the purpose of reporting and analysis are
1. Balance Sheet
2. P/L or Income Statement
3. Cash Flow Statement
4. Statement of Retained Earnings (or Shareholders’ Equity Statement)
In financial accounting, assets are recorded on the basis of historical costs in the balance
sheet, i.e., the assets are recorded at their original purchase price. Of course, the
depreciation on the asset is duly subtracted from its original value as the asset remains in
use of the business.
However, in financial management, book value is seldom used and financial managers
consider the market value and the intrinsic value of assets.
Market value may be defined as the value currently prevailing in the market or the value
at which the sellers are ready to sell, and buyers are ready to buy a particular asset.
Intrinsic value or the fair value is calculated by summing up the discounted future cash
flows
Financial accounting is one branch of accounting and historically has involved processes
by which financial information about a business is recorded, classified, summarised,
interpreted, and communicated; for public companies, this information is generally
publicly-accessible. By contrast management accounting information is used within an
organisation and is usually confidential and accessible only to a small group, mostly
decision-makers. Tax Accounting is the accounting needed to comply with jurisdictional
tax regulations.
Auditing is a related but separate discipline, with two sub-disciplines: internal auditing
and external auditing. External auditing is the process whereby an independent auditor
examines an organisation's financial statements and accounting records in order to
express an opinion as to the truth and fairness of the statements and the accountant's
adherence to Generally Accepted Accounting Principles (GAAP), or International
Financial Reporting Standards (IFRS), in all material respects. Internal auditing aims at
providing information for management usage, and is typically carried out by auditors
employed by the company, and sometimes by external service providers.
Accounting
The object of cost accounting is to find out the cost of goods produced or services
rendered by a business. It also helps the business in controlling the costs by indicating
avoidable losses and wastes.Management AccountingThe object of management
accounting is to supply relevant information at appropriate time to the management to
enable it to take decision and effect control.In this web primer, we are concerned only
with financial accounting. The objects of financial accounting as stated above can be
achieved only by recording the financial transactions in a systematic manner according to
a set of principles. The recorded information has to be classified, analyzed and presented
in a manner in which business results and financial position can be ascertained.
Uses of Accounting
Accounting plays important and useful role by developing the information for providing
answers to many questions faced by the users of accounting information.
(3) How well the different departments of the business have performed in the past?
(5) Out of the existing products which should be discontinued and the production of
which commodities should be increased.
(6) Whether to buy a component from the market or to manufacture the same?
(8) What has been the impact of existing policies on the profitability of the business?
(9) What are the likely results of new policy decisions on future earning capacity of the
business?
(10) In the light of past performance of the business how it should plan for future to
ensure desired results ?
Above mentioned are few examples of the types of questions faced by the users of
accounting information. These can be satisfactorily answered with the help of suitable
and necessary information provided by accounting.
(2) Accounting record, prepared on the basis of uniform practices, will enable a business
to compare results of one period with another period.
(3) Taxation authorities (both income tax and sales tax) are likely to believe the facts
contained in the set of accounting books if maintained according to generally accepted
accounting principles.
(4) Cocooning records, backed up by proper and authenticated vouchers are good
evidence in a court of law.
(5) If a business is to be sold as a going concern then the values of different assets as
shown by the balance sheet helps in bargaining proper price for the business.
It is not a limitation when high powered software application like HiTech Financial
Accenting are used to keep online and concurrent accounts where the balance sheet is
made available almost instantaneously. However, manual accounting does have this
shortcoming.
Financial accounting does not consider those transactions of non- monetary in nature. For
example, extent of competition faced by the business, technical innovations possessed by
the business, loyalty and efficiency of the employees; changes in the value of money etc.
are the important matters in which management of the business is highly interested but
accounting is not tailored to take note of such matters. Thus any user of financial
information is, naturally, deprived of vital information which is of non-monetary
character. In modern times a good accounting software with MIS and CRM can be most
useful to overcome this limitation partially.
Financial Accounting does not disclose the present value of the business
Basic accounting and bookkeeping are things people do not know enough about. And by
not teaching yourself this important discipline you cheat yourself out of knowledge that
can assist you in all aspects of your life, both professional and personal.
And if you think that accounting is complex, you're wrong. Although there are some
terms you may not understand, the actual math of basic accounting is just an applied
version of the math you learned at eight years-old.
Hopefully, this provides a bit better understanding of what accounting actually is.
Because accounting actually really simple. It is just a system that bundles and packages
financial information so that it can be used for a variety of individual or business
purposes.
Now here's more of what you need to know about the accounting equation and double
entry bookkeeping.
Earlier in the article you learned that the basic accounting equation is Asset = Liabilities
+ Equity. What this really means is that, from an accounting perspective, the value of
things you have (assets) is equal to the value of what you owe for the things (liabilities)
plus what you, as weird as it sounds, the value you don't owe for (equity).
Imagine you buy a car (an asset) for $30,000 dollars. If you borrowed $10,000 (a
liability) and paid the balance with your own savings, here is what the accounting
equation would look like: $30,000 car asset = $20,000 car loan liability + $10,000 equity
in the car.
Transactions can be a lot more complicated than this, but the principles remain the same.
Remember learning algebra in school? Maybe, maybe not. Anyway, do you remember
the rule that what you do on one side of an equation has to be done on the other side?
Yes, no?
Well, that's all the 'double' in double entry accounting means. When you put an increase
of x dollars on one side, you have to put an increase of x dollars on the other side as well-
two entries. That's the rule. In the double entry bookkeeping system, there are at least two
entries for every transaction.
Look again at the car example above. See that on one side there is $30,000 of car assets
and on the other is a $20,000 car loan and $10,000 of equity? This transaction has three
entries yet it still isn't very complex. In double entry bookkeeping all you do is look at
what happened in a transaction and ensure that you make proper sense of it.
In the car example, you know what happened. A car was purchased for $30,000 dollars
and a $20,000 loan was taken out to pay for it. The other $10,000 was paid by you. 30 =
20 + 10. Simple.
Double entry bookkeeping has some nuances that you can learn later, but those are the
basics.
Now...
Conclusion
Does the thought of keeping accounts scare you? Does your mind boggle at the mere
thought of the records you need to keep? Are you worried the IRS will penalize you for
not maintaining your accounts properly? Have no fear! We've charted a three step process
that will simplify bookkeeping and accounting for your business. Follow these steps and
you won't have to worry about it anymore.
The activity of keeping books is a three step process. By following them, you can easily
manage bookkeeping and accounting for your business:
1. Keeping bills and receipts - You must have a record for each and every business
transaction that your company is involved in. These records should contain the amount,
the date, and other details about that sale or purchase. While you need to store original
cash bills in physical form, pretty much all businesses maintain a computerized system of
accounts as well. Choose a system that fits your business needs.