Financial accounting is a subdivision of accounting which records, summaries, and reports numerous transactions as a company operates throughout a time frame. The company should summarise these transactions as it prepares financial statements, which includes cash flow statement, income statement, as well as balance sheet, that record the operating performance of its business throughout a specific duration.
How Financial Accounting Functions?
Financial accounting uses a set of recognised accounting principles. A company has to determine the type of accounting principles it needs to implement in financial accounting based on the regulatory as well as reporting requirements it encounters. For example, the public companies in most countries to carry out financial accounting according to IFRS, the International Financial Reporting Standards. The authorities establish these accounting principles so that the creditors, investors, regulators, as well as tax authorities, may receive consistent information for various purposes such as calculating the financial ratios.
The financial statements that people would use in financial accounting present the main categorisation of financial data: assets, revenues, expenses, equity and liabilities. People should account for and report the expenses and revenue on their income statement. Both of these can include anything from payroll to R&D.
Financial accounting enables people to determine the net income of their business at the bottom of their income statement. In contrast, on the balance sheet, they may report the assets, equity and liabilities accounts. The balance sheet uses financial accounting to report the possession of the business’s potential economic advantages.
Accrual Basis versus Cash Basis
One may perform financial accounting by utilising the accrual basis, cash basis or by combining both (Also see Difference Between Cash Accounting and Accrual Accounting).
Accrual accounting necessitated documenting transactions when they happened, and the revenue is identifiable.
Cash accounting necessitated documenting transactions only when the trade involves money. If a firm implements such a method, it should only record the revenue when it receives the payment, and it should only record the expenses when they make the payment.
What does that have to do with Managerial Accounting?
The essential dissimilarity between management accounting and financial accounting is that financial accounting targets at giving information to those who are on the outside of the firm, whereas the information in managerial accounting targets at assisting managers in the firm in making decisions.
The preparation of financial statement utilising accounting principles is closely related to the banks and the regulatory organisations. Since there are a lot of rules in accounting which do not translate well into the management of the business, the internal management would use different accounting procedures and regulations so that they may analyse the performance of the company.
As an entrepreneur, financial accounting is vital to you as it helps you to keep a tight grip on the finances of your business. Thus, engage an accounting firm in Johor Bahru if you need any assistance in it so that you may invest more time in developing your business without having to worry about accounting tasks.