Financial Accounting is the process of summarizing a company's financial data in an annual (or more frequent) report for the benefit of people outside of the organization. To gather the data, good bookkeeping (recording transactions) must be done throughout the year. To check whether the whole report is correct, everything is audited for publicly quoted companies to ensure its verity.
If reports are made for the managers, it is called management accounting.
Operations, Financing and Investments. Operations realizes profit, financing is needed for daily operation (and are rewarded by the profit) and investments are in long-term resources.
The annual accounts are, at minimum, a balance sheet, an income statement and accompanying notes. Together with the auditor's report it finishes up the accounts, which can encompass quite a substantial report. Please refer to the following link for more information on the balance sheet, income statements and cash flow statements.
Published accounts can be created for an individual trader, a sole company, a group of companies under common control and everything in between. Whereas there are many forms, we mainly focus on corporate accounting. The accounts of a group of companies is called a consolidated account. When one company is concerned, it is often a public company or a private company. The two main differences are:
- Public companies require more capital by law and hence have a larger capital base.
- Public companies have no restrictions on the transfer of shares, whereas private companies often do impose restrictions.
Users of Financial Accounts
From employees to public interest groups to governments to creditors - although the accounts are essentially meant for (potential) investors.
The Essence of Accounting
The main objective of published accounts is to make well-informed economic decisions. Hence, the financial information should have some desirable properties, the most important are that it should be:
- Understandable, for the knowledgeable user.
- Economically justifiable
In the end, one should remark that these published accounts are still based on estimates. Inventory, lifetime of buildings and receivables are quite subjective when putting an exact number on it. One thing is for sure though, when accounts are realized, the going concern assumption is used; i.e. that management trusts in the continuation of the company. As introduced, the accounts of a company carry a lot of weight with them, not only for the management, but also for the employees themselves.