Introduction to Financial Accounting

What is Financial Accounting?

Financial accounting is the process of recording and summarizing the financial transactions to present them in the form of financial reports including balance sheet, income statement, and statement of cash flows, etc.

Recording and summarizing are the two main tasks that financial accountants do most of the time in their accounting works.

Recording: refers to the process of analyzing everyday business events in day to day operation then posting into the accounting system. It includes recording the transactions of sales, purchasing of inventory, buying fixed assets and other everyday expenses, etc. Each time the transaction occurs, the recording of such transaction is required.

Summarizing: refers to the process of grouping all the business transactions and summing them up for presenting in financial reports at the end of the accounting period. It simply totals all business transactions during the year by following the accounting rule.

Why Financial Accounting?

There are so many transactions that occur during the year, so it is impractical to read the list of all those transactions in the accounting records. That is why the company need to summarize all the business transactions and presents them in financial reports. It is easy for users to understand the company’s performance and its position for the year.

Financial statements are usually the final purpose of financial accounting because at the end of the day users mostly only want the summary of the company’s financial information.

Financial statements consist of:

  • Income statement: shows the company’s performance during the accounting period.
  • Balance sheet: shows the company’s assets, liabilities, and equity by following the accounting equation.
  • Statement of cash flows: shows the company’s cash movement through operating, investing and financing activities.
  • Statement of changes in equity: shows the movement of equity through the company’s profit or loss, new share issue, reserves, and dividend, etc.