Financial Accounting

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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 Shareholders, 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. Management 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

Understanding the fundamental accounting concepts

Graphic definition The accounting equation (Assets = Liabilities + Ownership 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 income 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 [Ownership 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 [credit (finance)s

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 Ownership equity. Some assets of a company, however, cannot be claimed as Ownership 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 Ownership 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 (finance)' or 'debit' depending on the role they play in the accounting equation.

Assets = Liabilities + EquityorAssets - 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:

Qualified Accountant qualifications (Chartered Certified Accountant (Association of Chartered Certified Accountants), Chartered Accountant (Chartered accountant) and Certified Public Accountant (CPA))
CCA Chartered Cost Accountant (cost control) designation offered by the American Academy of Financial Management