The Why and How of Financial Accounting

The process of recording, summarizing and reporting the multitude of transactions from an enterprise, so as to provide an accurate picture of its financial position and performance is known as financial accounting.

The ‘Why’ of Financial Accountancy:

1. Preparation of financial statements:

The primary objective of financial accounting is preparing financial statements such as the balance sheets, income statements and cash flow statements that reflect the company’s operating performance over a particular period and financial position. These statements are generally prepared quarterly and annually.

2. Periodical transaction record:

Another aim of financial accountancy is bookkeeping, whereby records are forged after considering the financial aspects of the business systematically. The transactions that an enterprise does are recorded in detail upon logical summarization and classification and are used to prepare financial statements that are then analyzed and interpreted.

3. Consolidation of the results abstracted post transaction record:

A gross profit – loss account is maintained by the company and this account reflects the status quo of the business operations of that company for that particular time frame. If the company is at loss, that is, if the revenue is lesser than the expense then that will be clearly reflected. This aids the organization in general and the stake holders to make rational decisions and take necessary damage limitation steps, if required.

4. Measure of the overall business position:

Accountants periodically prepare a document which holds the status of the current assets, cash and liabilities held by the business organization, both long and short term. This helps in understanding the assets of the company and the liabilities of the company and how financially strong or weak is the company – i.e. this process is so very critical in measuring the monetary health of the overall business structure.

5. One stop shop for users seeking invaluable info:

Financial accounting can be deemed as a business language bearer and by preparing financial statements accountants are able to communicate and transmit all the critical readings, rational outputs, significant monetary numbers, and more to the multitude of stakeholders and other important personnel connected with the organization directly or indirectly. This in turn, optimizes the decision making process as a whole, which shapes the present and the future of the company.

6. Keeping the solvency position balance intact:

The management prepares a balance sheet which states the various assets, ventures, and properties owned by the business organization as a whole, not only that, it is a measure of every little inch owed by the company as well. Hence, this balance gives the detailed picture both in the long run and the short run i.e. the solvency position and the liquidity position respectively.

The ‘How’ of Financial Accountancy:

An enterprise has accountants and tax personnel who prepare financial statements that can be viewed by the public and the relevant stakeholders.

While preparing financial statements a company must comply with the following measures:

1. Relevance: These account statements should be relevant to the reader, it should be helpful in making decisions, the statements should be short and to the point and not cluttered and irrelevant.
2. Materiality: Information should be complete, no omission or misstatement should be there in the statements.
3. Reliability: Accounts must be free from significant error or bias, it should be completely reliable.
4. Ease of understanding: Accounting reports should be expressed as clearly as possible and should be understood by those at whom the information is aimed.
5. Ability to be compared: Financial reports from different periods should be comparable with one another and comparability can be achieved by applying the same accounting policies over time as this can help in achieving meaningful conclusions about the trends in a company’s financial performance and position over time.

Financial accounting is a part of every credible business out there, working in plain hindsight behind the scenes. Getting down to the gist of it can optimize the monetary standards of every organization.