Financial Accounting
Accounting is a discipline in business which makes it possible to determine the financial status of accompany. Insight and reports can then be presented and considered in making financial decisions. Karimi (2010) defines financial accounting as keeping records of revenues and keeping track of transactions as well are the expenses. This is important for a company to plan its business process that is done by the financial managers of an accounting department.
The main purpose of financial accounting is to keep record and identify the company’s activities and how they financially influence the organization. These activities include sales capital acquisition, purchases, and interests from investments. The activities in financial accounting are classified in terms of money and recorded in a specified record of accounting. These transactions are recorded in journals and legers in an accounting process called accounting cycle. The finical cycles, therefore, include reports and company’s performance within a specified period but most of them are yearly based (Dogra, 2010). The financial records are presented to the firm’s creditors, investors, and tax authorities.
Information from the business reports forms the financial statements. The four financial statements that GAAP requires are the balance sheet, the income statement, statement of owner’s equity, and the cash flow statement. The Balance sheet gives information of the financial position of a firm at a specified period of time. It is based on the fundamental model of accounting of Liabilities + Equity= Liabilities.
The Incomes statement is the total sum of revenues minus the expenses within a specified period of time. Information of entity operations is found in the income statement. This can be in the equation, Net Income = Revenues – Expenses. Revenue is the inflow from the manufacture and delivery of a product. Expenses are the incurred outflows that produce revenues.
The statement of Owners Equity is another financial record of the earnings that are retained in the firm or a statement of equity. Any changes of the retained earnings are recorded which are influenced by the dividends and income. The information used by the statement of retained earnings is from the information found in the Income statement that then provides balance sheet information. The equity statement proposition is; Winding equity= Beginning equity +Investments – Withdrawals + Income.
The cash flow statement gives the summary of cash use and sources of cash. This statement gives an indication whether routine business operations of the firm can be carried out depending on the availability of cash. This statement is vital in business accounting because the company can be making profits but also experiences low cash flow. Therefore, the firm can determine its ability to pay the required bills. The statement gives information of cash utility, cash sources, balance cash changes and use of cash. An analysis of all, transactions are presented in the cash flow statement. This is information of where the firm got cash and what the firm did with the cash. This information is classified into investing activities, financial activities, and operating activities. The construction of cash flow statement is from the ending and beginning balance sheets for the specified period and also from the income statement.
Dividends paid are substituted with withdrawals in the case of a corporation. The equity of stock holders is calculated in the rule;
Stock (Per value) + Premiums of the stock + Preferred Stock
Preferred stock premiums + retained earnings= Stockholders Equity
References
Needles, B and Powers M (2007) Financial Accounting
Edition9, illustratedPublisherCengage Learning, pp 14
Dogra, K (2010) Accounting for goodwill. Retrieved from
http://www.allbusiness.com/accounting-reporting/reports-statements
On August 23, 2010
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