Financial accountancy (or financial accounting) is the field of accountancy
concerned with the preparation of financial statements for decision makers, such as
stockholders, suppliers, banks, government agencies, owners, and other stakeholders. The
fundamental need for financial accounting is to reduce principal-agent problem
by measuring and monitoring agents' performance and reporting the results to interested users.
Financial accountancy is used to prepare accounting information for people outside the organization or not involved in the day
to day running of the company. Managerial accounting provides accounting
information to help managers make decisions to manage the business.
Financial accountancy is governed by both local and international accounting standards.
Basic accounting concepts
Financial accountants produce financial statements based on Generally Accepted Accounting Principles (GAAP) of a respective
country.
Financial accounting serves following purposes:
- producing general purpose financial statements
- provision of information used by management of a business entity for decision making, planning and performance
evaluation
- for meeting regulatory requirements
FRS 5 & SSAP 2 & fundamental accounting concepts
Graphic definition
The accounting equation (Assets = Liabilities +
Owners' Equity) and financial statements are the main topics of financial
accounting.
The trial balance which is usually prepared using the Double-entry accounting system forms the basis for preparing the financial statements.
All the figures in the trial balance are rearranged to prepare a profit & loss
statement and balance sheet. There are certain accounting standards that determine
the format for these accounts (SSAP, FRS, IFS). The financial statements will display the income and expenditure for the company
and a summary of the assets, liabilities, and shareholders or owners’ equity of the company on the date the accounts were
prepared to.
Assets, Expenses, and Withdrawals have normal debit balances (when you debit these types of accounts you add to
them)...remember the word AWED which represents the first letter of each type of account.
Liabilities, Revenues, and Capital have normal credit balances (when you credit these you add to them).
or
0 = Dr Assets Cr Owners' Equity Cr Liabilities
. _____________________________/\____________________________ .
. / Cr Retained Earnings (profit) Cr Common Stock \ .
. _________________/\_______________________________ . .
. / Dr Expenses Cr Beginning Retained Earnings \ . .
. Dr Dividends Cr Revenue . .
\________________________/ \______________________________________________________/
increased by debits increased by credits
Crediting a credit
Thus -------------------------> account increases its absolute value (balance)
Debiting a debit
Debiting a credit
Thus -------------------------> account decreases its absolute value (balance)
Crediting a debit
When you do the same thing to an account as its normal balance it increases; when you do the opposite, it will decrease. Much
like signs in math: two positive numbers are added and two negative numbers are also added. It is only when you have one positive
and one negative (opposites) that you will subtract.
Meaning of the accounting equation
The value of a company can be understood simply as the useful assets that ownership of a company entitles one to claim. This
value is known as Owners' Equity. Some assets of a company, however, cannot be claimed
as equity by the owners of a company because other people have legal claim to them -
for example if the company has borrowed money from the bank. The value of a resource claimable by a non-owner is called a
liability. All of the Assets of a company can be claimed by
someone, whether owner or not, so the sum of a company's equity and its
liabilities must equal the value of its Assets. Thus the
accounting equation describes what portion of a company's assets can be claimed by the owners.
Various account types are classified as 'credit' or 'debit' depending on the role they play in the accounting equation.
Assets = Liabilities + Equity or Assets - Liabilities - Equity = 0
Another way of stating it is:
Equity = Assets - Liabilities
which can be interpreted as: "Equity is what is left if all assets have been sold and all liabilities have been paid".
Related qualification
- There are several related professional qualifications in the field of financial accountancy including:
See also
External links
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