What is “accounting”?

Accounting is the art and science of recording, classifying, summarizing, and analyzing inputs to
make a sense of the information related to financial, management, or cost.

What is 'Financial Accounting'

Financial accounting is the process of recording, summarizing and reporting the myriad of
transactions resulting from business operations over a period of time. These transactions are
summarized in the preparation of financial statements, including the balance sheet, income
statement and cash flow statement, that record the company's operating performance over a
specified period.

Accrual Method vs. Cash Method

Financial accounting may be performed using either the accrual method, cash method or a
combination of the two. Accrual accounting entails recording transactions when the transactions
have occurred and the revenue is recognizable. Cash accounting entails recording transactions only
upon the exchange of cash. Revenue is only recorded upon the receipt of payment, and expenses
are only recorded upon the payment of the obligation.

Financial Accounting Vs. Managerial Accounting

The key difference between financial and managerial accounting is that financial accounting aims
at providing information to parties outside the organization, whereas managerial accounting
information is aimed at helping managers within the organization make decisions. Financial
statement preparation using accounting principles is most relevant to regulatory organizations and
financial institutions. Because there are numerous accounting rules that do not translate well into
business operation management, different accounting rules and procedures are utilized by internal
management for internal business analysis.

What are the objectives of financial accounting?

Financial accounting is the process by which an organization's transactions are collected,
measured, recorded and finally reported to the outside world. This process is designed to accurately
reflect business activity, help companies meet legal, fiscal and statutory requirements, present
financial accounts to business owners, allow for improved analysis, and facilitate efficient resource
allocation.

The Final Accounts

In a practical sense, the main objective of financial accounting is to accurately prepare an
organization's final accounts for a specific period, otherwise known as financial statements. The
three primary financial accounts are the income statement, the balance sheet and the statement of
cash flows.
Firms initially began preparing such accounts to provide important information to their
shareholders and loan creditors. Without reliable information, it is much riskier for lenders to grant
capital to a business. In turn, investors and shareholders compare final accounts among different
companies to look for higher-quality prospects.

The Objectives of Financial Statements

In 1973, the American Institute of Certified Public Accountants, or AICPA, released a study
entitled "The Objectives of Financial Statements." The study concluded that financial statements
were primarily useful for helping multiple parties make economic decisions.
The AICPA further described financial accounting as the proper method for delivering the final
accounts. The final accounts were primarily intended for those with only limited access to
information about a given business enterprise.

Objectives of Financial Accounting

Role of Accounting
Accounting is not an end in itself; it is a means to an end. It assists by providing quantitative
financial information that can be helpful for the users in making better decisions regarding their
business. Accounting also describes and analyses the mass of data of an organisation through
measurement, classification, and as well summation, and simplifies that data into reports and
statements, which show the financial situation and results of operations of that organisation.
Accounting as an information system gathers processes and carries information about an
organisation to a wide variety of interested investors or other parties.

Differences between Accounting and Book-Keeping

Book keeping generally involves only the collection of business transactions (transactions) and is
therefore, just one part of the process of accounting. About the accounting, this involves the
complete accounting process, i.e. identification, measurement, collection, and communication.
These days, much of the book keeping function is processed by the computer and other technology.

Objectives of Accounting
The basic aim of accounting is to give information to the interested parties to enable them all to
make important business decisions. The required information, particularly in the case of external
parties, is given in the basic financial statements: Profit and loss statement and the Balance sheet.
Besides the said sources of information, the internal parties, officers and other staff of the
company, can get additional information from the records of organisation. Thus the primary
objectives of accounting can be stated as :
1. Maintenance of Records of Business transactions
2. Calculation of Profit or Loss
3. Processing of Financial Position
4. Provide Information to the Parties
Financial Accounting Definition – Financial accounting helps to classify, analyze, summarize,
and record financial transactions of the company.
The main objective of financial accounting is to showcase an accurate and fair picture of financial
affairs of the company. To understand the fundamentals of financial accounting well, first, we
should start with double entry system and debit & credit, and then gradually should understand
journal and ledger, trial balance, and four financial statements.
 Double Entry System
 Journal
 Ledger
 Trial Balance
 Financial Statements
Debit and credit
Understanding debit and credit is easy. You need to remember two rules –
 Debit the increase of assets and expenses and the decrease of liabilities and incomes.
 Credit the increase of liabilities and incomes and the decrease of assets and expenses.
Here’s an example to illustrate debit and credit –
Let’s say that around $20,000 worth of capital is being invested into the company in the form of
cash.
Under double entry system, there are two accounts here – cash and capital.
Here cash is an asset and capital is a liability.
According to the rule of debit and credit, when an asset increases, we will debit the account and
when a liability will increase, we will credit the account.
n this example, both the asset and the liability are increasing.
So, we will debit the cash since it is an asset and we will credit the capital since it is a liability.

Journal entry
Journal entry is based on the debit and the credit of the accounts. Taking the previous example into
account, here’s how a journal entry will look like –
Cash A/c ………………….Debit $20,000 –
To Capital A/c…………………………….Credit – $20,000

Ledger Entry
Once you know the essence of double entry system, journal, and ledger, we need to look at ledger
entry.
A ledger entry is an extension of the journal entry. Taking the journal entry from above, we can
create a T-format for ledger entry.
Debit                                                     Cash Account                                                    Credit
To Capital Account $20,000
By balance c/f $20,000
Debit                                                  Capital Account                                                    Credit
    By Cash Account $20,000
To balance c/f $20,000

Trial balance
From ledger, we can create a trial balance. Here’s a snapshot and the format of a trial balance of
the example we took above.
Trial Balance of MNC Co. for the year-end
Particulars Debit (Amount in $) Credit (Amount in $)
20,000 –
Capital Account – 20,000
Total 20,000 20,000

Financial Statements
There are four financial statements that every company prepares and every investor should look at
–
 Income Statement
 Balance Sheet
 Shareholders’ Equity Statement
  Cash Flow Statement
Let’s understand each of them briefly.
Income statement:
The purpose of the income statement is to find out the net income of the company for the year. We
take into account all the financial transactions (including non-cash ones) and do a “revenue –
expense” analysis to find out the profit for the year. Here’s the format of income statement –
Particulars Amount
Revenue *****
Cost of Goods Sold (*****)
Gross Margin ****
Labour (**)
General & Administrative Expenses (**)
Operating Income (EBIT) ***
Interest Expenses (**)
Profit Before Tax ***
Tax Rate (% of Profit before tax) (**)
Net Income ***

Balance Sheet:
Balance Sheet is based on the equation – “Assets = Liabilities + Shareholders’ Equity”. Here’s a
simple snapshot of balance sheet so that you can understand how it is formatted.

Cash flow statement:

The objective of cash flow statement is to find out the net cash inflow/outflow of the company. The
cash flow statement is a combination of three statements – cash flow from operating
activities (which can be computed using a direct and indirect method of cash flow), cash flow from
financing activities, and cash flow from investing activities. All non-cash expenses (or losses) are
added back and all non-cash incomes (or profits) are deducted to get exactly the net cash inflow
(total cash inflow – total cash outflow) for the year.

What is Financial Accounting?

Financial accounting is the process of preparing financial statements that companies’ use to show
their financial performance and position to people outside the company, Including investors,
creditors, suppliers, and customers.
This is one of the most important distinctions from managerial accounting, which by contrast,
involves preparing detailed reports and forecasts for managers inside the company.

Financial Statements
Most companies put together quarterly and annual financial statements, which they make available
to shareholders and the investing public. There are four basic financial statements used in the
corporate world to show a company’s financial performance:
1. The income statement (also called the profit and loss statement) covers a specific period of
time (such as a quarter or a year).

On an income statement, Revenues - Expenses = Net Income.

 In accordance with the Generally Accepted Accounting Principals (GAAP), revenue is
always recorded in the period of the sale of the goods and services, which may not be the
same period when cash is actually received.
2. The balance sheet is a statement of assets and liabilities at the end of an accounting period.
In other words, the balance sheet is a financial snapshot at a specific point in time.

On a balance sheet, Assets = Liabilities + Stockholders’ Equity.

Stockholders’ equity is the amount of financing provided by operations (retained earnings

not distributed to stockholders) and by stockholders who reinvest through contributed
capital.
3. The cash flow statement shows the actual flow of cash into and out of a company over a
specific period of time, in contrast to the net income on the income statement, which is a
non-cash number.

A cash flow statement shows cash flows from operating activities, investing activities, and
financing activities.
4. The statement of retained earnings covers a specific period of time and shows the
dividends paid from earnings to shareholders and the earnings kept by the company.
Notes to financial statements provide additional information about the financial condition of a
company. The three types of notes describe accounting rules used to produce the statements, give
more detail about an item on the financial statements, and supply more information about an item
not on the statements.