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This is a detailed article on financial accounting. It was written to help you understand better what accounting is all about. It consists of meaning, types and examples of financial accounting. In addition, free pdfs and courses on financial accounting recommended by our experts to help improve your skills.
Financial Accountng 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 as a 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 in 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 in accounting 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 tock holders equity
As a result of accounting, determining net income which is always the last in income statement became a whole lot easy. It is important to know that it can work in small and big firms or business. In a 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
This is a type of financial accounting involved with a firm or a business focusing on corporates 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.
On the 12th of march, a box producing company receives an order from a distributor for 100 sets of boxes which costs $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.
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 goes 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 records the transaction as soon as it occurs unlike cash accounting which records a transaction only after payment.
A company who uses the accrual method for its financial accounting pays its tax say 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 have not been paid. If they were practising cash accounting the the tax will only be on the accounting statement on exactly 20th of every month since that is when it is actually paid.
There are a series of established accounting principles that guide the whole accounting process. Just like stated above one the principle is the GAAP. Moreover, the primary goal of establishing these principles is to provide consistent information to regulators, investors and probably tax authorities.
Similarly, all financial accounting types give financial record of a firm.
Financial Accounting Examples
These financial accounting examples will help you understand accounting 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
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
On the 1st of October, Z factors a company that produces footwears (small business) had $100 after production of 60 pairs of shoes. They sold 50 pairs of shoes to Sarah their distributor for $4000. Meanwhile, Z factors 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.
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.
Z factors income statement for June 2019
| Merchandise Sale |
|Costs of production|
|Gains||Income from renting some space||3500|
|Loses||Loses from damged goods||600|
|Net Income||(Revenue +Gains) – (Expenses + Losses)||43500 – 13630|
Financial Accounting PDFs
Accounting skills can be learned and improved without necessarily having a classroom degree. Here are some recommended financial accounting pdfs 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 at 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 accounting.
A Part Time Online Financial Accounting Course for Beginners thought 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 & Financial Ratio Analysis made easy. Learn important accounting skills that will get your foot in the door!
Above all, accounting is very important for every firm were 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 the financial statement is at risk of failure. These financial accounting methods, however, helps 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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