Financial accounting is an area of accounting dealing with a systematic process of documenting, summarizing, and communicating the myriad of financial transactions resulting in business operations over a span of time. It covers all financial records related to a business, such as sales statements, cash balances, and other financial documents. This includes information regarding the working capital, accounts payable and receivable, income taxes, payrolls, purchases, sales, purchases, and inventory. It also takes into account all other relevant financial transactions that have a direct or indirect affect on the results of the business activities.
All the financial accounting reports are prepared in accordance with generally accepted accounting principles (GAAP). The reporting process includes several stages such as preparation of the financial statement, assessment of the operating and maintenance expenses, valuing the assets, inventory, liabilities, and other financial transactions and valuing financial assets. Financial accountants create the financial reports by organizing the data in a manner that provides an accurate picture of the company’s assets, liabilities, and assets as well as its expenses and revenues. The first step that is taken in preparing the financial reports is to collect all the financial information that is required for the preparation. These include bank statements, profit and loss statements, balance sheet, statement of cash flows, income statement, and other reports that may be prepared based on the particular requirements of the particular financial accounting report.
The next step in the financial accounting process is to summarize all the financial transactions and the results of those transactions. For example, in the income statement, the cash flows are reported that go to buy property, pay wages, provide equipment, sell inventory, rent buildings and furnishings, pay tax debts, etc. The statement of cash flows thus summarizes all the cash-using activities during a period of time, called a running balance. The balance sheet, on the other hand, reports the difference between assets and liabilities and thus reports a net asset position. The profit and loss statement reports the revenue and the expenses that were generated by the activities during the period of business operations. Reporting of these transactions is an important requirement for the preparation of financial accounting reports.
The principles of accounting are used to determine the measurement of the total revenue. These principles include: the cost principle, the revenue principle, the loss principle, the gross profit principle, the margin principle, and the double-taxation principle. The principles of accounting have been formulated to provide methods by which managers can measure, record, and evaluate the income or assets, liabilities, and surplus or deficit of a business. Also find some management information on Product Management Job Descriptions – The Ultimate Guide so you can get a full detailed paint on management.
A manager who is involved in the preparation of the financial statement must adhere to the principles of financial accounting. This will include principles such as: identifying the sources of revenue, measuring the costs of goods or services sold, analyzing the relationships among the sources of funds and the financial resources, determining the ratios of assets to liabilities, and identifying the elements of operating finance. Principles of managerial accounting also include: the use of standard accounting principles, the creation of policies to achieve reasonable assurance regarding the accuracy and reliability of financial statements, maintaining proper bookkeeping records, the preparation of reports at intervals needed, the reporting of financial information, and the review of financial data. It is important for managers to remember that all these principles of managerial accounting must be uniformly applied in order to make reliable estimates and projections of future financial results.
External stakeholders such as customers, suppliers, regulatory bodies, and the media are able to provide critical and useful information to managers to help them make decisions based on the accurate financial reporting. In addition to external stakeholders, managers rely on internal and external information to understand, plan, implement, and control business activities. Managers should also remember that although they can make informed decisions based on their knowledge, they cannot rely on information from external stakeholders alone. As a result, it is very important for managers to follow the principles of financial accounting very strictly. This will ensure that the processes they use are guided by sound principles of management and accounting that will in turn give them the opportunity to achieve high levels of performance and create positive financial results.