Financial Accounting | Basic Concepts

Introduction to Financial Accounting:

Financial accounting is a specialized branch of accounting that keeps track of a company's financial transactions. Using standardized guidelines, the transactions are recorded, summarized, and presented in a financial report or financial statement such as an income statement or a balance sheet.

Companies issue financial statements on a routine schedule. The statements are considered external because they are given to people outside of the company, with the primary recipients being owners/stockholders, as well as certain lenders. If a corporation's stock is publicly traded, however, its financial statements (and other financial reporting) tend to be widely circulated, and information will likely reach secondary recipients such as competitors, customers, employees, labor organizations, and investment analysts.

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.

What is Accounting?

Accounting is a vital part of any individual, business or organization’s economic foundation.  It plays a major role in defining financial condition and performance, in terms of operation, profitability and sustainability.

"Accounting is the art of identifying, recording, classifying and summarizing, in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character and interpreting the results thereof."
-American Institute of Certified Public Accountants (AICPA)

" Accounting is the science of recording and classifying business transactions and events primarily of a financial character and the art of making significant summaries, analysis and interpretations of those transactions and events and communicating the results to persons who must make decisions or form judgement. "
-Smith and Ashburne

Objectives:
The objectives of financial accounting can be put in four categories, as follows:

• Record financial transactions as and when they occur (bookkeeping), so that the data can be analysed for preparing financial statements.
• Calculate profit or loss, to enable management to take course-correction strategies if required.
• Ascertain the financial strength of the company by determining its assets and liabilities.
• Communicate the information to stakeholders through statements and reports, so that these stakeholders can take appropriate decisions on their investments in the business.