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Financial accountancy

Financial accountancy

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Financial accountancy (As seen by the COB) (or financial accounting) is the field of accountancy
Accountancy
Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management; the art lies in...

 concerned with the preparation of financial statements
Financial statements
A financial statement is a formal record of the financial activities of a business, person, or other entity. In British English—including United Kingdom company law—a financial statement is often referred to as an account, although the term financial statement is also used, particularly by...

 for decision makers, such as stockholder
Shareholder
A shareholder or stockholder is an individual or institution that legally owns one or more shares of stock in a public or private corporation. Shareholders own the stock, but not the corporation itself ....

s, supplier
Vendor (supply chain)
A vendor, or a supplier, is a supply chain management term meaning anyone who provides goods or services to a company. A vendor often manufactures inventoriable items, and sells those items to a customer.- History :...

s, bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...

s, employees, government agencies, owners, and other stakeholders. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power. 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
Management accounting
Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control...

 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
Accounting records
Accounting records are all sources of information and evidence that are used in preparing, verifying and or auditing financial statements. Accounting records also includes documentation to prove ownership of assets creation of liabilities and evidence of monetary and non monetary...

 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
Generally Accepted Accounting Principles
Generally Accepted Accounting Principles refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards...

 of a respective country. In particular cases financial statements must be prepared according to the International Financial Reporting Standards
International Financial Reporting Standards
International Financial Reporting Standards are principles-based standards, interpretations and the framework adopted by the International Accounting Standards Board ....

.

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
Accounting equation
The basic accounting equation' is the foundation for the double-entry bookkeeping system. For each transaction, the total debits equal the total credits.In a corporation, capital represents the stockholders' equity.-In practice:...

 (Asset
Asset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...

s = Liabilities + Owners' Equity
Ownership equity
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...

) and financial statements are the main topics of financial accounting.

The trial balance
Trial balance
A trial balance is a list of all the nominal ledger accounts contained in the ledger of a business. This list will contain the name of the nominal ledger account and the value of that nominal ledger account. The value of the nominal ledger will hold either a debit balance value or a credit value...

 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
Income statement
Income statement is a company's financial statement that indicates how the revenue Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that...

 and balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...

. There are certain accounting standards that determine the format for these accounts (SSAP, FRS, IFRS). 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 to which the accounts were prepared.

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).
0 = Dr Asset
Asset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...

s Cr Owners' Equity
Ownership equity
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...

  Cr Liabilities
. _____________________________/\____________________________ .
. / Cr Retained Earnings
Retained earnings
In accounting, retained earnings refers to the portion of net income which is retained by the corporation rather than distributed to its owners as dividends. Similarly, if the corporation takes a loss, then that loss is retained and called variously retained losses, accumulated losses or...

 (profit) Cr Common Stock
Common stock
Common stock is a form of corporate equity ownership, a type of security. It is called "common" to distinguish it from preferred stock. In the event of bankruptcy, common stock investors receive their funds after preferred stock holders, bondholders, creditors, etc...

  \ .
. _________________/\_______________________________ . .
. / Dr Expenses  Cr Beginning Retained Earnings
Retained earnings
In accounting, retained earnings refers to the portion of net income which is retained by the corporation rather than distributed to its owners as dividends. Similarly, if the corporation takes a loss, then that loss is retained and called variously retained losses, accumulated losses or...

 \ . .
. Dr Dividends  Cr Revenue
Revenue
In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....

  . .
\________________________/ \______________________________________________________/
increased by debit
Debit
Debit and credit are the two aspects of every financial transaction. Their use and implication is the fundamental concept in the double-entry bookkeeping system, in which every debit transaction must have a corresponding credit transaction and vice versa.Debits and credits are a system of notation...

s increased by credit
Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...

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.

Related qualification


Many professional accountancy qualifications cover the field of financial accountancy, including Certified Public Accountant
Certified Public Accountant
Certified Public Accountant is the statutory title of qualified accountants in the United States who have passed the Uniform Certified Public Accountant Examination and have met additional state education and experience requirements for certification as a CPA...

 (CPA), Chartered Accountant
Chartered Accountant
Chartered Accountants were the first accountants to form a professional body, initially established in Britain in 1854. The Edinburgh Society of Accountants , the Glasgow Institute of Accountants and Actuaries and the Aberdeen Society of Accountants were each granted a royal charter almost from...

 (CA or other national designations) and Chartered Certified Accountant
Chartered Certified Accountant
Chartered Certified Accountant was historically seen as a British qualified accountant designation awarded by the Association of Chartered Certified Accountants . However, although ACCA is UK based, it is a global body for professional accountants with 147,000 qualified members and 424,000...

 (ACCA
Association of Chartered Certified Accountants
Founded in 1904, the Association of Chartered Certified Accountants is the global body for professional accountants offering the Chartered Certified Accountant qualification . it is one of the largest and fastest-growing global accountancy bodies with 147,000 members and 424,000 students in 170...

).

See also

  • International Financial Reporting Standards
    International Financial Reporting Standards
    International Financial Reporting Standards are principles-based standards, interpretations and the framework adopted by the International Accounting Standards Board ....

  • Constant item purchasing power accounting
  • Historical cost accounting
  • Philosophy of accounting
    Philosophy of accounting
    The philosophy of accounting is the conceptual framework for the professional preparation and auditing of financial statements and accounts. The issues which arise include the difficulty of establishing a true and fair value of an enterprise and its assets; the moral basis of disclosure and...

  • Accounting analyst
    Accounting analyst
    An accounting analyst evaluates public company financial statements. Public companies issue these annual financial statements as required by the Security and Exchange Commission. The statements include the balance sheet, the income statement, the statement of cash flows and the notes to the...

    , whose job involves evaluating public company financial statements
  • Management accounting
    Management accounting
    Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control...

    , the other main division of accounting

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