Financial Accounting
Financial accounting is the process of recording,summarizing and reporting the myriad of transactions resulting from business
operations over a period of time. These transactions are summarized in the
preparation of financial statements, including the balance sheet, incomestatement and cash flow statement, that encapsulate the company's operating
performance over a specified period.
Financial accounting utilizes a series of established
accounting principles. The selection of accounting principles to use during the
course of financial accounting depends on the regulatory and reporting
requirements the business faces. For public companies in the United States,
businesses are required to perform financial accounting in accordance with
Generally Accepted Accounting Principles (GAAP). International public companies
also frequently report financial statements in accordance to International
Financial Reporting Standards. The establishment of these accounting principles
is to provide consistent information to investors, creditors, regulators and
tax authorities.
Accrual Method Vs. Cash Method
Financial accounting may be performed using either the
accrual method, cash method or a combination of the two. Accrual accounting
entails recording transactions when the transactions have occurred and the
revenue is recognizable. Cash accounting entails recording transactions only
upon the exchange of cash. Revenue is only recorded upon the receipt of
payment, and expenses are only recorded upon the payment of the obligation.
Financial reporting occurs through the use of financial
statements. The financial statements present the five main classifications of
financial data: revenues, expenses, assets, liabilities and equity. Revenues
and expenses are accounted for and reported on the income statement. Financial
accounting results in the determination of net income at the bottom of the
income statement. Assets, liabilities and equity accounts are reported on the balance
sheet. The balance sheet utilizes financial accounting to report ownership of
the future economic benefits of the company.
Financial Accounting Vs. Managerial Accounting
The key difference between financial and managerial
accounting is that financial accounting aims at providing information to
parties outside the organization, whereas managerial accounting information is
aimed at helping managers within the organization make decisions. Financial
statement preparation using accounting principles is most relevant to
regulatory organizations and financial institutions. Because there are numerous
accounting rules that do not translate well into business operation management,
different accounting rules and procedures are utilized by internal management
for internal business analysis.
Accounting Certifications
The most common accounting designation demonstrating an
ability to perform financial accounting within the United States is the
Certified Public Accountant (CPA) license. Outside of the United States, holders
of the Chartered Accountant (CA) license demonstrate the ability as well. The
Certified Management Accountant (CMA) designation demonstrates more an ability
to perform internal management functions than financial accounting.
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