Financial Accounting

Business, Legal & Accounting Glossary

Definition: Financial Accounting


Quick Summary of Financial Accounting


A term usually applied to external reporting by a business where that reporting is presented in financial terms.




Full Definition of Financial Accounting


Financial accountancy (or financial accounting) is the field of accountancy concerned with the preparation of financial statements for decision-makers, such as stockholders, suppliers, banks, employees, government agencies, owners, and other stakeholders. The fundamental need for financial accounting is to reduce principal-agent problem by measuring and monitoring agents’ performance and reporting the results to interested users.

Financial accountancy is used to prepare accounting information for people outside the organization or not involved in the day to day running of the company. Managerial accounting provides accounting information to help managers make decisions to manage the business.

Financial accountancy is governed by both local and international accounting standards.

Basic Accounting Concepts

Financial accountants produce financial statements based on Generally Accepted Accounting Principles (GAAP) of a respective country.

Financial accounting serves the following purposes:

FRS 5 & SSAP 2 & fundamental accounting concepts

  • Understanding the fundamental accounting concepts

Definition

The accounting equation (Assets = Liabilities + Owners’ Equity) and financial statements are the main topics of financial accounting.

The trial balance which is usually prepared using the Double-entry accounting system forms the basis for preparing the financial statements. All the figures in the trial balance are rearranged to prepare a profit & loss statement and balance sheet. There are certain accounting standards that determine the format for these accounts (SSAP, FRS, IFS). The financial statements will display the income and expenditure for the company and a summary of the assets, liabilities, and shareholders or owners’ equity of the company on the date the accounts were prepared to.

Assets, Expenses, and Withdrawals have normal debit balances (when you debit these types of accounts you add to them)…remember the word AWED which represents the first letter of each type of account.

Liabilities, Revenues, and Capital have normal credit balances (when you credit these you add to them).

When you do the same thing to an account as its normal balance it increases; when you do the opposite, it will decrease. Much like signs in math: two positive numbers are added and two negative numbers are also added. It is only when you have one positive and one negative (opposites) that you will subtract.

Meaning Of The Accounting Equation

The value of a company can be understood simply as the useful assets that ownership of a company entitles one to claim. This value is known as Owners’ Equity. Some assets of a company, however, cannot be claimed as equity by the owners of a company because other people have a legal claim to them – for example if the company has borrowed money from the bank. The value of a resource claimable by a non-owner is called a liability. All of the Assets of a company can be claimed by someone, whether an owner or not, so the sum of a company’s equity and its liabilities must equal the value of its Assets. Thus the accounting equation describes what portion of a company’s assets can be claimed by the owners.

Various account types are classified as ‘credit’ or ‘debit’ depending on the role they play in the accounting equation.

Assets = Liabilities + Equity or Assets – Liabilities – Equity = 0

Another way of stating it is:

Equity = Assets – Liabilities

which can be interpreted as: “Equity is what is left if all assets have been sold and all liabilities have been paid”.

Related Qualifications

There are several related professional qualifications in the field of financial accountancy including:

  • Qualified Accountant qualifications (Chartered Certified Accountant (ACCA), Chartered Accountant (CA) and Certified Public Accountant (CPA))
  • CCA Chartered Cost Accountant (cost control) designation offered by the American Academy of Financial Management

Synonyms For Financial Accounting


financial reporting, financial accountability, submit financial reports, accounting, ifrs-based

Cite Term


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Financial Accounting. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. https://payrollheaven.com/define/financial-accounting/ (accessed: August 06, 2021).
American Psychological Association (APA):
Financial Accounting. PayrollHeaven.com. Retrieved August 06, 2021, from PayrollHeaven.com website: https://payrollheaven.com/define/financial-accounting/

Definition Sources


Definitions for Financial Accounting are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 23rd April, 2020 | 1 Views.