Basic Financial Accounting Concepts
Financial accounting has been used for centuries as an important branch of accounting. It assists firms in understanding their ownership, debt, profit, and ability to satisfy short-term obligations. Accounting's objective is to calculate the profit and loss of business operations and to state a company's financial condition at the end of a certain period with the help of personal accounting software. Businesses must keep accounting records to communicate income and loss statistics to stakeholders, who might be individuals or entities within or outside the organization.
Basic financial accounts assist stakeholders in making sound decisions. Financial accounting is one of the oldest fields of accounting, concentrating on the systematic recording of financial transactions to determine an organization's financial situation. This blog will discuss the Financial Accounting objectives, concepts, and principles for making informed decisions.
Objectives Of Financial Accounting
- A systematic record is maintained of all financial transactions.
- Protect commercial properties from unauthorized and unjustified use.
- Determine the net profit or loss incurred due to carrying out business operations for a specific accounting period.
- Determine what the company owns, what it owes, and if it can satisfy its obligations in the foreseeable future.
- Provide stakeholders with systematized information.
- Assist both internal and external stakeholders in making sensible decisions.
Financial Accounting Concepts
1. Accrual concept
The accrual or cash foundation of accounting can be used in financial accounting. Transactions in accrual accounting must be recorded when they result in cash flow, whereas transactions in accrual accounting are recorded when they occur, and revenue is recognized. Organizations should use either strategy consistently.
2. The concept of an economic entity
This approach believes that the owners are distinct from the firm and that no personal interactions are documented in the books.
3. The concept of a going concern
This concept assumes that the company will be in business for a long time; therefore, revenue can be delayed until later.
4. Concept of matching
This notion emphasizes the importance of recording expenses related to a specific income in the same period. This ensures that a transaction is completely recorded.
5. Materiality Concept
The goal of reporting should be to report on all material transactions. Material transactions are those that, if not included, can influence an investor's assessment of the business.
6. Dual aspect concept
According to the dual accounting idea, every transaction has a dual impact and should be documented in two separate accounts. This is stated as Assets = Liabilities + Capital, where assets are the claims of owners and outsiders. Owners' claims are referred to as capital, while outsiders' claims are referred to as liabilities. The Double Entry System of Accounting is founded on this duality principle, which ensures equality on both sides of the equation.
7. Conservatism
Revenue must be reported only when it is reasonably certain that income will be received shortly. The double-entry bookkeeping system is at the foundation of financial accounting. The term "dual entry system" refers to recording two components of the same transaction. The Golden Rules of Accounting shall record the aspects.
How Are Financial Statements Prepared?
Businesses in a certain country/region adhere to standard financial statements and accounting rules to preserve uniformity and make comparisons easier. Regulatory restrictions and the intended audience determine these principles. Indian enterprises adhere to Indian Accounting Standards, US companies adhere to GAAP, and overseas companies adhere to IFRS. These standards aid in correctly reporting and explaining complex transactions while assuring uniform accounting and being updated regularly to accommodate company subtleties.
Presentation Of Financial Statements
The reporting of transactions that occurred during the fiscal period is known as financial accounting. A financial term can be any length of time. On the other hand, year-end financial statements are typically prepared for a 12-month period.
A fiscal year in India runs from April 1st to March 31st. Some businesses report on a calendar year basis. The organizations will present their financial statements, also known as financial reporting, with the help of tax software for accounting professional, at the end of the specified time.
The financial statements provide information on five major components of a corporation.
- Revenue
- Expense
- Asset
- Liabilities
- Equity
The income statement accounts for revenue and expenses, while the balance sheet accounts for assets, liabilities, and equity.
Conclusion
Financial accounting is the process of gathering, summarizing, and presenting financial data resulting from corporate activities. It informs stakeholders about the operating profit and the worth of the company. In other words, financial accounting presents financial transactions to stakeholders in a format that all firms can accept and modify.
