Financial Accounting Principles

Study Notes

Financial Accounting is the process of recording business transactions into accounts which ultimately culminates in the preparation of financial statements such as income statement, balance sheet, cash flow statement etc. These statements show how much money comes into your company from sales, how much goes out towards expenses like rent and salaries, what assets you own, and what liabilities you have left over after all these transactions have been accounted for.

Accounting records serve several purposes including keeping track of daily transactions, analyzing transactions to understand business trends, preparing various types of reports and providing information to people who want to invest in the company. In essence, it's the recordkeeping system used by businesses to measure their performance over time—to see if they're making enough profit compared with other companies to pay off their debts and make a good rate of return on investment.

The primary purpose of financial accounting is to prepare financial statements reflecting the economic activities of a corporation so that interested parties can judge its ability to generate future earnings and dividends, to meet obligations coming due, to maintain its physical plant, equipment, and personnel, and to finance expansion through retained profits or issuance of new common stock.

Financial accounting involves three basic steps: identifying, measuring, and communicating. Identifying means recording each transaction within specific accounts; Measuring refers to putting numbers onto those transactions according to certain rules; Communicating means disclosing those figures publicly via financial statements. Some fundamental concepts in financial accounting include depreciation and accrual basis accounting. Depreciation refers to spreading out the cost of fixed assets over a period of years whereas Accrual Basis Accounting requires recording revenue when earned and expense when incurred irrespective of the actual payment date.

In summary, financial accounting provides vital information needed for decision-making processes within any organization while serving stakeholders' needs for transparency & credibility regarding corporate finances. It helps management evaluate past performances, plan future operations more effectively and predict potential risks enabling them to take informed decisions.

Description

Explore the fundamentals of financial accounting, including recording business transactions, preparing financial statements like income statement and balance sheet, and analyzing transactions to understand business trends. Learn about key concepts such as depreciation, accrual basis accounting, and the primary purpose of financial accounting in evaluating a company's performance and financial health.