What is Financial Accounting? – Definition, Purpose and Fundamentals

Financial Accounting is the branch of accounting that helps in the financial transactions classification, analysis, summarization and recording. In this regard, an organization attains accuracy and fairness in all the affairs relating to its finances.

The Main Purpose of Financial Accounting

The information required in the process of making sound economic decision making in organizations is provided through accounting. In this regard, the financial reports that provide this information for use by both internal and external stakeholders are attained through Financial Accounting. Through Financial Accounting, an organization accurately prepares its specific period’s final accounts otherwise known as financial statements.

Financial Accounting Fundamentals

Financial Accounting is a process and this branch of accounting is characterized by the following elements:

  • Double entry system: This forms the main tenet of financial accounting and it means that in any financial transaction there is always a debit and a related credit.
  • Journal: This is a chronological record of any company’s list of all financial transactions based on the double entry concept.
  • Ledgers: Ledgers record business transactions by assigning specific accounting items.
  • Trial balance: This is a bookkeeping worksheet with the debit and credit columns used for listing with the totals of both columns expected to be equal.
  • Financial statements: These are financial accounting records that sum up an organization’s operational results besides being an indicator of the respective company’s financial position. The four main financial statements include the statement of financial position, the income statement, statement of cash flows and statement of changes in equity.

Types of Financial Accounting

There are two main types financial accounting as discussed below:

  • Accrual accounting: Under this method of financial accounting, revenues and expenses are recognized when earned irrespective of when money is actually received or paid. It is the method that is widely used because its idea of income and expenses is more realistic, which is important in the determination of the going concern perspective of an organization. Without adequate and proper monitoring and controls, this method of accounting can be devastating to businesses since it is insensitive to cash flows.
  • Cash accounting: In this form of financial accounting, revenues and expenses are recognized when cash is actually received or paid respectively. Therefore, both accounts receivable and accounts payable cannot be recognized by this method. Cash Accounting is widely used by small businesses due to its simplicity and ease in transaction determination.

The Financial Accounting Process

The financial accounting and/or accounting process takes place in three distinct phases: the start of period transactions, individual transactions, and end of period transactions or activities.

  • Start of period transactions: This involves the verification of actual reversal of previous period’s reversal transactions to avoid double recording.
  • Individual transactions: Individual transactions in the financial accounting process are handled as follows:
      1. Transaction identification and classification
      2. Document preparations such as invoices
      3. Recording Accounts identification
      4. Actual Transactions recording
  • Process-end phase: This phase involves information aggregation and financial statements preparation through the following steps:
      1. Trial balance preparation
      2. Trial balance adjustment
      3. Adjusted trial balance preparation
      4. Financial statements preparation
      5. Accounting period closure
      6. Post-closing period trial balance preparation

The Financial Accounting process is both rigorous and lengthy and involves numerous activities and steps. The most important fundamental element in this process is the general ledger because it provides all the information used in the preparation of all the financial statements. The process can also result in boredom because the same and/or similar process is undertaken a year in year out. However, through our accounting homework solver, students can get assistance and improve their grades in the process. Get in touch with us at Top Paper Archives to get homework word problem solver to complete your assignments.