Do you find it hard to understand the concepts of financial accounting? If yes, then this blog post is just the right thing which you need.
Go through the blog. You will understand all the basics of financial accounting surely. Don’t worry if things don’t look easy to you. If you have chosen it for further studies, stick to your decision.
The subject is perfect for all those who aspire to build a perfect career. Read out the blog, and you will be done with the basics of financial accounting. Also, you can clear your doubts by getting personalised assignment help online.
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Let’s get a quick overview. You will know what you are going to know about financial accounting through this blog. Here we go:
-What is financial accounting?
-Description of financial accounting
I. Income Statement
II. Balance Sheet
III. The Cash Flow Statement
IV. The Statement of Retained Earnings
– Difference between Financial and Managerial Accounting
What is Financial Accounting?
Financial accounting is the procedure of preparing financial statements for companies. These financial statements are used to show the financial ups and downs. Also, it shows the position of the company to its relevant people.
The users of financial statements are of two types:
The inside users are the people who work within the company, i.e. the management and staff. On the other hand, outside users are those are connected to the company but not from within the company. These are:
-Customers of the company
Description of financial accounting
We know that financial accounting is a segment of accounting which keeps track of financial transactions. In this part of the blog post, we will discuss it a little more.
The accountants use standardised guidelines to record transactions. It summarizes them to present a financial statement. These financial statements are:
-The cash flow statement
-The statement of retained earnings.
Majorly, companies issue the financial statements on fix intervals. These statements are considered as externals. This is because they are to be handed over to the outsiders. By outsiders, I mean those who are linked with a company from outside. The primary recipients of the financial statements are owners and stockholders and some lenders as well.
It depends upon the structure of the company that in which length will the financial statements will be regulated. If a company or corporation’s stocks are traded publicly, then it’s obvious that the statements will be circulated widely to a number of secondary recipients. These recipients include
It is important to highlight the main purpose of financial accounting. It is to provide enough information for others. So that, they can assess the value of a company for themselves and not report the value of a company.
Usually, companies prefer to put the quarterly and annual financial statements together. Then they make them available for shareholders and the investing public. There are four fundamental financial statements used in the corporate world.
1. Income statement
The income statement is also known as the profit and loss statement. It covers a particular period of time. This period can be a year or a quarter. This statement shows profitability in a specific time period. The major components of the income statement are:
-Gains and losses
-Revenues involve the following: sales, interest revenue, and service revenue.
-Expenses involve the cost of goods sold, non operating expenses. It includes: expense
operating expenses (salaries, advertising, utilities, rent, etc.)
If a corporation’s stock is publicly traded, the earnings per share of its common stock are reported on the income statement.
The basic structure of an income statement is:
Revenues – Expenses = Net Income
Adhering to GAAP (Generally Accepted Accounting Principles) revenue is recorded in a period which witnesses the sale of goods and services. It may or may not be the same period in which the cash is received.
Tips to prepare an income statement
(a) Format the body
Income statements have four different segments:
The 1st segment of the income statement calculates gross profit from sales revenue and cost of goods sold.
The 2nd segment deals with the calculation of operating income from operating expenses and gross profit.
The 3rd segment deals with the calculation of non-operating income. This income is based on expenses and non-operating revenues.
The 4th segment deals with the calculation of net income using all expense and revenue information.
(b) Make the gross profit section
-Write “Sales revenue” below the income statement header. Mention the sales revenue for the period.
-Mention “Cost of goods sold” below “Sales revenue.” You should list the cost of goods sold in the period.
-Label the next line as “Gross profit.”
-Subtract the cost of goods sold from sales revenue.
(c) Make the operating income sheet
-Mention every specific operating expense.
– Add every operating expense line item
Do this to determine the total operating expenses.
-Label the next line as “operating income.”
(d) Make the Non-operating Income Section
-Write down every specific non-operating revenue.
-Write down the non-operating expenses the business has.
-Deduct non-operating expenses from non-operating revenues.
(d) Make the net-income section
– the next line as “Net-income.”
-Add non-operating income to operating income.
-Transfer the remaining balance to the retained earnings.
2. Balance Sheet
The balance sheet is a statement which deals with the assets and liabilities at the ending of an accounting period. It can be considered as an overall financial picture at the particular period of time.
The balance sheet is divided into three parts:
Liabilities The balance sheet is divided into three parts:
This is the first section of the balance sheet. In this one, we report the assets of a company. Assets include:
The midsection is responsible for reporting the liabilities of a company. It deals with the obligations which are due till date. Most often it constitutes the word “payable.” For instance, Wages Payable, Accounts Payable, Interest Payable, etc.
The final section of a balance sheet is stockholders’ equity. You can understand it as a difference between the amount of liabilities and the amount of assets.
The basic structure of a balance sheet is:
Assets = Liabilities + Stockholders’ Equity
It is the amount of finance provided by operations. It is the retained earning which distributed to stockholders. Plus, it is done by stockholders who reinvest through the contributed capital.
I will also tell you how you can become a pro in making balance sheets. Check out the tips below, use them and see the difference.
Tips for preparing a balance sheet
(a) Understand the basic equation completely
The basic structure which stands above is the basic equation for financial accounting. You have to make sure that you understand it perfectly.
Though, it will take your time as you will have to get into some details. This is because the equation is a very simplified version of everything. Everything that a real balance sheet calculate.
(b) Calculate the assets
Assets, money, investments, and products the business owns that can be converted into cash. These are what put companies in the financial positive.
A company must have assets that are more than the sum of its liabilities. This generates value in the company’s stock or equity and gives new opportunities for financing. Assets are two types:
Fixed assets: supplies, property, and intangible assets
Current Assets: Cash, accounts receivable, inventory, prepaid insurance, securities.
(c) Identify the liabilities
Liabilities are a negative part of every equation. It involves operational costs, material expenses, and debt. The lower the liabilities, the greater the value of the company. “Current Liabilities” include cash spent, as well as any debts that must be paid out within one year, while “Fixed Liabilities” refer to bills due any time after one year.
Liabilities are of two types:
Fixed liabilities: Bills which are due anytime after one year. It includes Shareholder’s loan, bonds payable, car loan, pension benefit obligations, etc.
Current liabilities: The cash spent, and any debts that must be paid out within the period of a year. It includes:
-Operating line of credit
-Business credit cards
(d) Equity valuation
Owner’s Equity = Assets – Liabilities
The value of the assets minus the liabilities gives an estimation of the value of the company’s capital. It is easy to understand that if this equation will give a negative result, then the situation is harmful to the company. This will hamper secured financing.
-Opening balance equity
3. The cash flow statement
This statement provides the actual cash flow into the company in and out of a company in a particular time. In contrast with the income statement which shows the net income, cash flow statement showcases the cash from different activities.
The statement of cash flow is categorized into three parts:
-The section of operating activities describes:
the way in which company’s cash or cash equivalents have changed with effect to the operations.
-The section of investing activities deals with:
the amount received or spent in transactions which involve long-term assets.
-The last section is of financing activities which express the following aspects:
money spent to remove long-term liabilities, issuance of stock or issuance of long-term debt.
Tips to prepare a cash flow statement
(a) Gather important data and documents
-Balance sheet (statement of financial position)
-Statement of variations in equity for the current reporting period
-Statement of comprehensive income
(profit or loss statement + statement of other comprehensive income if applicable)
-Statement of cash flows for the previous reporting period
(b) Put the change of balance sheet in the cash flow
The rationale that backs this step is that every change in the balance sheet can influence the cash flow statement. You must check out the changes in your balance sheet and enter every number to the blank form of cash flow statement.
(c)Make Adjustments for Non-cash Items
Make the statement of other comprehensive income and profit or loss statement. After this, identify numbers where the non-cash transactions can be recorded. let’s see how non-cash adjustments are as follows:
-The expense for recognition or income from recognition of various provisions
-Change in revaluation reserves
-Interest income and expense
-Income tax expense
-Foreign exchange differences at the end of the period
-Revaluation of certain assets and liabilities at the end of the period
-Transfer the balance of net income to retained earnings
4. The statement of retained earnings
Statement of retained earnings is the last one on the list. This one records the earnings kept by the organization or company. Plus, the dividend paid from the earnings to shareholders.
The notes to financial statements give additional information on companies financial status. The three kinds of notes explain accounting rules used to, give more detail about a particular item on financial statements, produce the statements & supply more information regarding an item not on the statements.
Retained earnings are the part of the net income which is not distributed among the shareholders. It retains within the business for different purposes. Major ones are the growth of business and to meet the debt obligations.
It relies on the profit and loss the company bears. If the net income increases the retained earning increases as well and vice-versa as well. It is shown as a component of stockholders equity in the balance sheet.
Tips to prepare a statement of retained earnings
(a) Prepare a heading for the statement of retained earnings
Your Statement of Retained Earnings must constitute a three-line header. The first line is the name of the company.
The second line is, “Statement of Retained Earnings.”
The last and third line is “For the Year Ended XXXXX.”
(b) Mention the previous balance of retained earnings
The very first component on a Statement of Retained Earnings needs to be the balance of retained earnings from the previous year. This can be traced from the balance sheet of the preceding year.
(c) Do add the net income from the income statement
The second financial statement is the statement of retained earning itself. Plus, the income statement is the first one. You just have to add the net income from the income statement.
(d) Additional Information
Preparing the fundamental statement of retained earnings is straightforward. There are a few more details shown in an actual retained earnings statement.
This was the general outline of structuring different financial statements. By following the tips anybody can learn to prepare financial statements. Still, if in case you find anything tough to do, you can always clear your doubts by availing assignment help.
Difference between Financial and Managerial Accounting
It is important for you to know the difference between financial and managerial accounting. Managerial accounting subject is too different from financial accounting. It deals with preparing detailed reports for the managers inside the company. It is also known as cost accounting. Let’s get into a quick differentiation between both:
Basis of difference
Monetary and Non-Monetary information
Type of Information
Monetary information only
Only internal management
Internal and external parties
Complete and Detailed reports
Prepared as per the need of organization
Prepared at the end of the accounting period
Now, we have discussed enough regarding the meaning and major components of financial accounting. Now, it’s time to see what can you can by investing your time in the subject. In the next section, you will get an insight to the career opportunities after studying financial accounting.
Here is the time to look back and give a quick revision to yourself. In the beginning, we dealt with the meaning and description of financial accounting, through which we knew that it is all about recording and presenting the financial transactions and status of a company or an organisation.
After this, we went to look over the main components of the concept which are the four different financial statements. I hope by reading them, you know the way in which the four statements, i.e., the income statement, balance sheet, the cash flow statement and the statement of retained earnings are made. Then we made a quick comparison between financial and managerial accounting.
Accounting experts are here to help you
We know that financial accounting is a wide concept. The whole blog can help you with the basics, but this is not enough for the subject. You can get stuck at some or other concept. This is the point where are accounting experts will help you a lot.
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