A layman will define financial accounting as
- the language of business,
- a method to convey information about a business to users, or
- means to communicate financial information.
Technically financial Accounting is a formal process of:
- Identifying business transactions that has financial impact
- Recording of financial information pertaining to business transactions
- Organizing records
- Summarizing the records to extract meaningful results
- Communicating Results to intended users in the form of a report or statement
In short financial accounting is a process that helps communicate relevant financial information pertaining to business transactions to the users of such information to help them in making economic decisions.
Financial transaction is the exchange of valuables between two partied involving funds or subsequent settlement of obligations. For example buying and selling goods for cash or on credit is a financial transaction. Similarly Paying off an obligation is also a financial transaction.
‘Recording financial transaction’ is preparing a voucher (manual or computerized) by passing double entry in General Journal. (Note: For details please read the topic of book-keeping.)
‘Organizing financial transactions’ is preparing ledger accounts by posting all vouchers relating to a specific accounting period. (Note: For details please read the topic of preparing ledger accounts.)
‘Summarizing financial transactions’ is deriving a trial balance from the ledger accounts. (Note: For details please read the topic of preparing trial balance.)
‘Representing financial transactions’ is preparing financial statements for the stakeholders to present the results of the business. These financial statements include statement of financial position, income statement, cash flow statement, statement of changes in equity and notes to the financial statements.
Conclusion:
Above discussion concludes that Financial Accounting is a structured system of recording financial information and providing this information to the stakeholders for decision making.
Author: Zuhair Afzaal
Studied Chartered Accountancy and now Pursuing Professional Career as Financial Consultant, Manager Accounts and Finance. A teacher by passion and likes to make things easier for students by publishing courses and lecturing in on-campus and online classes
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