Financial Accounting Definition and Components
Financial Accounting Definition – A stream of accounting concerned with recording, summarizing, analyzing and presenting the financial information in the form of financial statements.
It is one of the stream of accounting. In this field of accounting, firstly various transactions are recorded and then a summary is prepared. After summarizing all the transactions, financial statements are prepare in order to present the information to the stakeholders of the company. These stakeholders are creditors, investors, banks, financial institution, etc.
Financial Accounting is governed by accounting standards and accounting principles. The purpose of financial accounting is not about giving the value of company. Instead it deals with providing sufficient information to the general public or potential investors so that they can assess the real worth of the organisation. In addition to this, financial accounting is for the outsiders or the people who are not the part of the day to day activities of the business.
Prerequisites for Good Financial Accounting
In order to understand the financial accounting definition more clearly, let’s look at the important point that should be taken into consideration while doing financial accounting.
Relevance – The information shown in the financial statement should be of relevant nature. The information should be like if not shown can influence the perspective or decision of the investor.
Reliable – Information should be reliable. There should not be any error or bias.
Understandable – Businesses should present the information in such a manner that the users of the information have no difficulty in making conclusion out of it.
Comparable – All the financial statements should be prepare keeping in mind all the rules, guidelines, standards and concepts of accounting. In addition to this, the accounting methods should be of consistent nature. So that the stakeholders can easily compare it with other organisation.
Components of Financial Accounting
There are three components of financial accounting which are as follows –
Income Statement – It is a statement which reflects the net income or net loss of an organisation. The main elements of this statements are sales or revenues, COGS, sales return/ sales discounts, selling and administrative expenses, depreciation, interest expense and tax expenses.
Balance Sheet – A statement that shows the financial position of a business on a particular date. Nowadays, companies prepare Balance Sheet on quarterly basis. This statement is divided into two parts – Assets and Liabilities. Assets consists of fixed assets, current assets, fictitious assets, etc. On the other hand liabilities side consists of shareholders equity and liabilities. As per accounting rules the liabilities side should be equal to the Assets side.
Cash Flow Statement – A statements which records the inflow and outflow of cash. It consists of three activities which are operational activities, investing activities and financing activities.