This is a detailed article on financial accounting. It was written to help you understand better what accounting is all about. It consists of the meanings, types, and examples of financial accounting. In addition, free pdfs and courses on financial accounting are recommended by our experts to help improve your skills.
Financial Accounting Meaning
This is a particular branch in accounting that reports all the records of transactions from the business done within a range of time. This report is the result of summarizing, analyzing, and reporting the records in a financial statement.
A person who manages finance or a financial account is called a financial accountant. A financial accountant can work for companies or decide to be a freelancer. Financial accounting is governed by some guidelines and frameworks called Generally Accepted Accounting Principles (GAAP). This is why accounting, whether local or international, follows a particular standard and rules in summarizing and making statements.
How Financial Accounting works
There are a series of established accounting principles that guide the whole accounting process, just like stated above one, the principle is the GAAP. Therefore, the primary goal of establishing these principles is to provide consistent information to regulators, investors, and probably tax authorities.
Everything that is recorded for analysis is done in the financial statements, including revenues and expenses. However, the financial statement is classified into 5.
The financial statements can be classified into five kinds of data;
- Balance sheet
- Cashflow statement
- Income statement
- Statement of stockholder’s equity
As a result of accounting, determining net income, which is always the last in the income statement, became a whole lot easy. It is important to know that it can work in small and big firms or businesses. In as much as financial statements are legally required for registered companies, these statements are included in a company’s annual report.
Types of Financial Accounting
#1. Cash Accounting
This is a type of financial accounting involved with a firm or a business focusing on corporate transactions involving cash. Any transaction without monetary input cannot be in the statements because this type of accounting records income as they are received. They always credit or debit the cash account based not the transaction made.
In other words, they record revenues when they actually receive the funds and record expenses only when they are paid.
For instance;
On the 12th of March, a box-producing company received an order from a distributor for 100 sets of boxes, which cost $9000. The distributor paid for the goods on the 31st of March. This means that the company will record the transaction on the 31st because they received the money. Therefore, the company assumes that no transaction was made until the 31st of March.
#2. Accrual Accounting
In this type of financial accounting, a business or firm regards the monetary inflow and outflow, present or expected. In that case, they record all transactions, including debit and credit. They adopt the cash accounting method and go even further to record the whole transaction, irrespective of if the cash is received or not.
Firms or businesses that use this kind of accounting record the transaction as soon as it occurs, unlike cash accounting which records a transaction only after payment.
For instance;
A company that uses the accrual method for its financial accounting pays its taxes on the 20th of every month. However, the financial accountant can add the tax while writing a financial statement on the 5th of that same month, even though the tax has not been paid. If they were practicing cash accounting, the tax would only be on the accounting statement on exactly the 20th of every month since that is when it is paid.
There are a series of established accounting principles that guide the whole accounting process. Just like stated above, one principle is GAAP. Moreover, the primary goal of establishing these principles is to provide consistent information to regulators, investors, and probably tax authorities.
Similarly, all financial analysis types give a financial record of a firm.
Financial Accounting Examples
These financial analysis examples will help you understand calculation statements. It can also serve as a template to write yours.
Importantly, the statement of cash flows contains the inputs and outputs in actual cash within a period of time. Making these financial statements needs financial literacy qualifications.
Cash flows; Cash inflow -Cash outflow + Opening balance = Closing balance
Example 1
On the 1st of March 2018, Brian started a small business with $300 in his account. In the same march, Brian borrowed $700 from his friend Jacob. He also bought new sets of chairs( for business) for $90.
Take a look at Brian’s cash flow statement for the month of March;
- Cash Inflow = $700
- Cash outflow = $90
- Opening balance = $300
- Closing balance = $910
Example 2
On the 1st of October, Z Factors, a company that produces footwear (small business), had $100 after the production of 60 pairs of shoes. They sold 50 pairs of shoes to Sarah, their distributor, for $4000. Meanwhile, Z Factor paid their tax of $200 on the 21st of October. Also, on the 21st of the same month, they sold 10 pairs of shoes for $800 to Smith on credit.
Take a look at Brian’s cash flow statement for the month of October;
Cash inflow: $4000 (how much they got in cash, not including credit).
Cash outflow: $200 ( money they spent within the month).
Opening balance: $100
Closing balance: $4000- $200 + $100 = $3900 ($800 was not included)
Please note: Cash flow statement only considers transactions that involve actual cash, however ignoring all credit and debts that haven’t been paid.
Example
In the example of financial accounting below, you will understand better how to make an income statement. This can also serve as a template to write yours.
Income Bond: Definition and detailed explanation
Z factors income statement for June 2019
| Revenue | Merchandise Sale Revenue Total revenue |
32000 8000 40000 |
|
Expenses |
Costs of production Wages expenses Rent Interests logistics Utility expense Supplies Total expenses |
9000 800 1500 700 250 280 500 13,030 |
| Gains | Income from renting some space | 3500 |
| Loses | Loses from damaged goods | 600 |
| Net Income | (Revenue +Gains) – (Expenses + Losses) | 43500 – 13630 = 29870 |
Financial Accounting PDFs
Accounting skills can be learned and improved without necessarily requiring a classroom degree. Here are some recommended financial accounting pdf to help you;
- Financial Accounting by Robert Libby,Patricia A. Libby, Daniel G. Short
- Financial Accounting: Meaning, Nature, and Role by Dr. Mahesh Chand Garg
- Finacnial Accounting by Saylor.org
- Basic concepts of financial Accounting
- Introduction to Financial Accounting edited by Dr Chijioke Mgbame
Financial Accounting Courses
These are some certified financial accounting courses you can take on your own time at your convenient time. Meanwhile, this course is suitable for beginners and those that are willing to update their skills or get a certification in financial analysis.
A part-time online financial accounting course for beginners taught in an “easy-to-follow” manner.
This course will introduce you to the exciting world of finance and provide you with key accounting knowledge and skills.
Honored by the President of the United States for outstanding teaching, learn Accounting from the self-made millionaire.
Learn the Basics of Financial Accounting: Financial Statements, Debits and Credits, The Accounting Cycle, and More!
Accounting and financial ratio analysis made easy. Learn important accounting skills that will get your foot in the door!
What is the Main Function of Financial Accounting?
Financial accounting’s main goals are the recording and analysis of financial transactions, the preparation of financial reports, and the projection of future financial outcomes. Financial accounting’s primary objective is, as always, to supply management and shareholders with reliable information about the company’s financial health in the form of financial statements.
What are the 5 Roles of Accounting?
When it comes to the financial accounting department, there are five basic roles that they perform. They include:
- Payroll
- Financial controls
- Financial reporting
- Accounts payable
- Accounts receivable
Who is the Father of Accounting?
The Italian Luca Pacioli is often regarded as the founder of modern accounting since, in 1494, he first detailed the system of double-entry bookkeeping used by Venetian merchants in his work Summa de Arithmetica, Geometria, Proportioni et Proportionalita.
What is the Main Objective of Financial Accounting?
Financial accounting’s major objective is to show the company’s profits and losses and present a true and fair perspective of the company in order to protect the interests of its many constituents, both internal and external.
What are Golden Rules of Financial Accounting?
- Rule 1: Debit all expenses and losses, credit all incomes and gains.
- Rule 2: Debit the receiver, credit the giver.
- Rule 3: Debit what comes in, credit what goes out.
Who uses Financial Accounting?
To preserve accurate financial records, one must adhere to the guidelines established by financial accounting. Financial accountants are employed by organisations of all sizes to maintain accurate financial records and provide useful financial reports. But lenders and investors aren’t the only external users of financial data.
Is Financial Accounting Hard?
Financial accounting is not a challenging field of study. However, it is a challenging major that calls for a lot of time and effort. Accounting can be a rewarding profession if you enjoy working with numbers and solving puzzles and are prepared to put in the time and effort required to succeed in the field.
In Conclusion,
Above all, accounting is very important for every firm, big or small. Most big firms like Yahoo Finance make financial statements at least every month. Meanwhile, some small business doesn’t see any reason why it is important. Any business without any form of financial statement is at risk of failure. These financial accounting methods, however, help a business grow properly.
The above example of financial accounting and statements must be handled by a professional that either work in the firm or consulted.
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FAQ
What are the types of financial accounting?
- Cash Accounting
- Accrual Accounting
What is financial accounting and example?
This is a particular branch in accounting that reports all the records of transactions from the business done within a range of time. This report is a result of summarizing, analyzing, and reporting the records in a financial statement.
