financial accounting

📘 What is Financial Accounting?

Financial Accounting is a branch of accounting that involves recording, summarizing, and reporting a company’s financial transactions through financial statements. These statements provide an accurate and fair view of the company’s financial position and performance to external parties such as investors, creditors, regulators, and tax authorities.

🔑 Key Features of Financial Accounting:
Feature Description
Objective To determine the financial results and position of the business.
Focus On historical data – it records past financial transactions.
Users External users (e.g., shareholders, government, banks).
Reports Generated Balance Sheet, Income Statement (P&L), Cash Flow Statement, etc.
Standards Followed Based on standards like GAAP or IFRS, depending on the country.
Time Frame Generally reported on a monthly, quarterly, or annual basis.
Double Entry System Every transaction affects two accounts (debit and credit).
📊 Major Financial Statements:

📄 Income Statement (Profit & Loss Account):
Shows revenues and expenses during a period → tells whether the company made a profit or loss.

📄 Balance Sheet:
Shows assets, liabilities, and equity at a specific point in time → represents the financial position.

📄 Cash Flow Statement:
Tracks cash inflows and outflows from operating, investing, and financing activities → shows cash position.

📄 Statement of Changes in Equity:
Shows how the owner's equity has changed over the reporting period.

✅ Importance of Financial Accounting:

Compliance with legal and tax regulations

Transparency for investors and lenders

Decision-making support for management and stakeholders

Auditing and internal control purposes

🧠 Basic Concepts Used in Financial Accounting:

Accrual Principle – Revenues and expenses are recorded when they are earned/incurred, not when cash is exchanged.

Going Concern Assumption – The business will continue to operate in the foreseeable future.

Consistency – Same accounting methods should be used over time.

Conservatism – Anticipate no profits, but account for all possible losses.