Financial accountancy

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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, employees, government agencies, owners, and other stakeholders. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.^[1] 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. Management accounting provides accounting information to help managers make decisions to manage the business.

In short, financial accounting is the process of summarizing financial data taken from an organization's accounting records and publishing in the form of annual (or more frequent) reports for the benefit of people outside the organization.

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 of a respective country. In particular cases financial statements must be prepared according to the International Financial Reporting Standards.

Financial accounting serves the following purposes:

• producing general purpose financial statements
• producing information used by the management of a business entity for decision making, planning and performance evaluation
• producing financial statements for meeting regulatory requirements.

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 an profit & loss statement and balance sheet. Accounting standards determine the format for these accounts (SSAP, FRS, IFRS). Financial statements 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 to which the accounts were prepared.

Expenses and withdrawals have normal debit balances, i.e., debiting these types of accounts increases them.

Liabilities, revenues, and capital have normal credit balances, i.e., crediting these increases them.

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 the same thing is done to an account as its normal balance it increases; when the opposite is done, it will decrease. Much like signs in math: two positive numbers are added and two negative numbers are also added. It is only when there is one positive and one negative (opposites) that you will subtract.

Related qualification

Many professional accountancy qualifications cover the field of financial accountancy, including Certified Public Accountant (CPA), Chartered Accountant (CA or other national designations) and Chartered Certified Accountant (ACCA).

See also

• Constant item purchasing power accounting
• Historical cost accounting
• Philosophy of accounting
• Accounting analyst, whose job involves evaluating public company financial statements
• Management accounting, the other main division of accounting

References

External links

• Financial Accounting Study Resource