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Financial accountancy (or financial accounting) is the branch of accountancy concerned with the preparation of financial statements for external decision makers, such as stockholders, suppliers, banks and government agencies. The fundamental need for financial accounting is to reduce principal-agent problem by measuring and monitoring agents' performance.
The accounting equation (Assets = Liabilities + Owners' Equity) and financial statements are the main topics of financial accounting.
A financial accountant prepares the financial statements. The trial balance 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 a profit & loss statement and balance sheet. There are certain accounting standards that determine the format for these accounts (SSAP, FRS, IFS). 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 the accounts were prepared to.
or 0 = (−) Assets + Owners' Equity (+) Liabilities . _____________________________/\____________________________ . . / + Retained Earnings (+) Common Stock \ . . _________________/\_______________________________ . . . / (−) Expenses (+) Beginning Retained Earnings \ . . . (−) Dividends (+) Revenue . . \________________________/ \___________________________________________________/ (−)increased by debits (+)increased by credits simple mapping: subtracting from a negative absolute value Thus
-- account increases its
-- debiting a debit balance
Basic Accounting Concepts
Financial Accounting produces the Financial reports based on the Four Accounting Concepts:
1. Going Concern concept
2. Prudent Concept
3. Consistancy Concept
4. Accrual Concept
FRS 5 & SSAP 2
Rules for entries into accounts:
Asset Accounts
On increase - debit
On decrease - credit
Liablity Accounts
On increase - credit
On decrease - debit
Owner's Equtiy Accounts
On increase - credit
On decrease - debit
Revenue Accounts
On increase - credit
On decrease - debit
Expence Accounts
On increase - debit
On decrease - credit
Meaning of the accounting equation
The value of a company can be understood simply as the useful assets that ownership of a company entitles one to claim. This value is known as Owners' Equity. Some assets of a company, however, cannot be claimed as equity by the owners of a company because other people have legal claim to them - for example if the company has borrowed money from the bank. The value of a resource claimable by a non-owner is called a liability. All of the Assets of a company can be claimed by someone, whether owner or not, so the sum of a company's equity and its liabilities must equal the value of its Assets. Thus the accounting equation describes what portion of a company's assets can by claimed by the owners.
Various account types are classified as 'credit' or 'debit' depending on the role they play in the accounting equation.
Assets = Liabilities + Equity (move assets to the right)
0 = −Assets + Liabilities + Equity
Another way of stating it is:
Equity = Assets - Liabilities
which can be interpreted as: "Equity is what is left over of assets, once liabilities have been paid".
See also
- Accounting analyst
- Cost & Management accountant
- Accounting Technician
- Bookkeeper
- Auditor
- Forensic accountant
External links
- Financial Accounting Standards Board
- American Institute of Certified Public Accountants
- International Accounting Standards Board
- Association Certified Chartered Accountants
- Institute of Chartered Accountants
- Notes + Practice Problems to Learn accounting Fundamentals at "FutureAccountant.com"
"Financial accountancy"