If you ever had a chance to glance over some public company’s financial statements, you most likely noticed the repeated references to financial accounting. This is because this type of accounting is responsible for everything that gets included in annual reports. Additionally, it sets the requirements that dictate the way in which certain things can be presented.
Well, although this slightly clarifies the purpose, there are still many questions left to be answered when it comes to financial accounting in general. What is its primary purpose? How does it go about delegating every single public sector in the nation? Who is in charge of the rules that this profession seeks to enforce? Luckily, all of these questions can be easily answered as soon as someone spends the necessary time reviewing the basics of financial reporting.
Related Resource: 20 Most Affordable Online Bachelor’s in Accounting
Simple Overview
Financial accounting is a professional discipline that deals with the proper preparation of financial statements. For those unfamiliar, these include the income statement, statement of retained earnings, balance sheet, and the statement of cash flows. When completed and verified by an independent auditor, they are included in the entity’s annual report that showcases how their operations during the previous year went. That way, current and prospective investors will have something to rely on when making important decisions about purchasing or selling stocks, joining venture capital projects, and so on.
Rules of Financial Accountancy
To explain all the rules that exist in this sphere would be virtually impossible. The reason why is that there are different entities that pass on their own sets of guidelines depending on the industry, location, and many other factors.
For example, the Financial Accounting Standards Board (FASB) is the governing entity for the United States of America where they oversee the so-called Generally Accepted Accounting Principles or GAAP. In other words, they are the ones who create and regulate the market by employing financial standards that have to be followed by issuing entities. If one goes overseas, however, FASB will seldom have much impact as that region is governed by the International Accounting Standards Board (IASB) that passes their own International Financial Reporting Standards (IFRS).
The Foundation
The accounting practice that deals with financial reporting in the United States employs the popular double-entry system. Per Forbes, this means that every debit journal entry for a transaction will have to accompanied by a matching credit entry. To understand how each account is classified, there is a basic accounting formula that states how assets have to equal the sum of one’s liabilities and their stockholders’ equity. From that point on, everything gets a bit more complex as one gets introduced to contra accounts; the concept of accrual and cash basis of reporting; adjusting and closing entries; and much more. Nevertheless, understanding the double-entry system is a great starting point for anyone who wants to explore this sector in more depth.
As a profession, accounting constantly changes based on the conditions in the market. This is a direct consequence of the passage of new laws that concern public companies. Regardless, financial accounting aims to offer the most comprehensive way of recording and dealing with an enterprise’s operations for a specific period.
