Financial Accounting and Its Nature


To whom want to know about Financial Accounting, this article will give you something that you should know. The nature of Accounting is commonly can be divided into the following areas

  • Financial Accounting
  • Managerial or Cost Accounting
  • Tax Accounting
  • Nonprofit or Fund Accounting

What is Financial Accounting
Financial accounting is the process that culminates the preparation of financial reports on the enterprise for internal and external of the enterprise. Investors, creditors, managers, union and government agencies are the users of these financial reports.

How with Managerial or Cost Accounting
Managerial or Cost Accounting is the process of identifying, measuring, analyzing and communicating financial information needed by management to plan, evaluate and control an organization’s operations.

Financial statements provide

  • Balance sheet
  • Income statement
  • Statement of cash flows
  • Statement of owner’s / stock holder’s equity

There are several objectives of financial reporting used by business enterprises

  1. To investors, creditors and other users in making rational investment, credit and similar decisions.
  2. To help the investors, creditors and other users in assesing the amounts, timing and uncertainty of prospective cash receipts from dividens or interest, proceeds from the sale, redemption or maturity of securities or loans.
  3. Economic resources of an enterprise claims to obligations of the enterprise to transfer to other entities and owners’ equity as jotted down on their financial reporting.

The objectives of financial reporting to provide

  • Informations for investment and credit decisions.
  • Informations in assessing cash flow prospects.
  • Informations about enterprise resources.

To provide informations they used accrual basis instead of cash basis. What is the difference between Cash Basis and Accrual Basis of accounting.

Accrual basis of accounting provides a better indication of an enterprise’s present and continuing ability to generate favorable cash flows. Cash flow means cash generated and used in operations. Cash flow is frequently used also to include cash obtained by borrowing and used to repay borrowing, cash used for investments in resources and obtained from the disposal of investments and cash contributed by or distributed to owners. Objective of accrual basis accounting is to ensure that events that change an entity’s financial statements are recorded in the periods in which the events occur, rather than only in the periods in which the entity receives or pays cash. Using accrual basis to determine net income means recognizing revenues when earned rather than when cash is received and recognizing expenses when incurred rather than when paid.

Under accrual accounting, revenues for the most part are recognized when sales are made so they can be related to the economic environment of the period in which they occurred. Over the long run, trends in revenues are generally more meaningful than trends in cash receipts.

Cash basis of accounting is used very rare, the events that change an entity’s financial statement are recorded not in the periods in which the events occur but recorded in the periods in which the entity receives or pays cash. Under cash basis accounting, revenues are recognized when sales are made along with cash receives.

Accounting plays an important role in obtaining a higher standard of living because it helps investors and lenders to identify efficient and inefficient users of resources. Investors and lenders can compare the income, earned and assets employed, they can assess the relative return and risks associated with investment opportunities and resources more effectively.

Business enterprises consist of

  • Economic resources called assets
  • Economic obligations called liabilities
  • Residual interests called owners’ equity

which are increased or decreased by economic activities.

Accounting accumulates and reports economic activity as it effects the elements of each business enterprise. In large organizations, the corporate form of organization tends to divorce ownership from management. The owners in most large organizations are the stockholders who directly and indirectly hire managers to run the firm.

To provide standards that ensure the relevance, reliability and comparability of information reported to absentee owners, accounting need a standard measuring called Accounting Standards. To meet these needs and to satisfy them, accountants prepare a single set of general purpose financial statements to present fairly, clearly and completely the economic facts of the existence and operations of the enterprise in order to minimize the potential dangers of bias, misinterpretation, inexactness and ambiguity. The accounting profession has attemted to develop a set of standards that is generally accepted and universally practiced called Generally Accepted Accounting Principles (GAAP). That is why the preparation of financial statements must follow all rules set by GAAP.

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One Response to Financial Accounting and Its Nature

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