Financial Accounting and Its Importance to a Company

Financial Accounting
Post in Accounts

Financial accounting is a field in accounting that deals with the process of gathering, recording, summarizing and reporting a countless number of financial data relating to business.

The goal is to report the financial picture and performance of the business at certain of point or over a period. The product of financial accounting is a financial report that contains statements and explanatory notes. This report includes the balance sheet, income and the cash flow statement.

Explanatory notes follow the financial statement to explain or clarify issues such as the inventory methods used, owner’s equity and contingent liabilities, and any other material lines items in the statement. Internationally, financial accounting is executed in line with International Financial Reporting Standards (IFRS).

In the USA, financial accounting is done in accordance with Generally Accepted Accounting Principles (GAAP). Financial accounting uses a series of organized accounting principles. All International public companies report financial statements in accordance with IFRS.

Few methods of financial accounting

  1. Accrual method:

Financial accounting may be performed based on this method or cash method. The accrual method is highly accepted. A transaction under the accrual method is recorded when a deal takes place and earnings is recognized. Once an organization specifies the mode of transaction, cash or accrual, it should regularly use the same.

  • Conservatism:

In this method, its principles suggest that a business should focus more on its future loses than its future profits. Hence, revenue should only be recorded when there is a certainty that it will be accomplished in the future.

  • Economy entity method:

It states that a business entity’s revenue should be kept separate from that of the owners, shareholders, or related partners. Thus, all financial transactions must be allocated to a specific business, and its operation cannot be mixed with other accounting records.

  • Going concern method:

It is a fundamental principle in accounting. It presumes that the company will be able to complete its present plans using all existing assets and continue to meet all its fiscal obligations. It is also called a continuing concern concept. In other words, a company will stay in business and that its business will not encounter any issues.

Elements of financial accounts

Financial accounting usually keeps track of all accounts in a fiscal year. A fiscal year can be between any periods. Most companies follow the calendar year for the fiscal year. This account is called financial reporting.

The total group of financial accounts contain five accounts and five elements that financial accounts are based on are:

  • Accounts of balance sheet
  • Accounts of the income statement
  • Accounts of cash flow
  • Accounts of change In equity and
  • Observe financial statements.

The financial accounts contain five main elements of financial information, and they are assets, revenue, liabilities, expense and equity.

Why is financial accounting crucial to any company?

Financial accounting is essential to the business of all extent because it helps in various ways-

  1. Record Transactions:

Maintaining records helps businesses keep account of all its transactions. This form of accounting is called bookkeeping. Financial accounting uses the double-entry system i.e. each deal affects two accounts. The two accounts record the debit and credit of cash to represent the outflow of cash.

  • External communication of details:

The statement and reports collected by financial accounting are used to give details about the prosperity of the company to the external bodies. These outside bodies may include banks or suppliers who demand details to examine the progress of the business and compare it with their desires.

  • Internal communication of details:

Certain members of the finance team may be keen to know the profit sharing or equity-based payment settlements. For small companies, owner can use financial accounting to share deals about the company’s strong and weak points with employees. It may also be to encourage employees to be more productive.

  • Review and comparison:

Financial accounting help companies examine the market and assess investment possibilities. The financial accounting principles of companies are mostly similar; provides for a standard method of study.

Improving Financial Accounting Skills

Some skills can be developed to improve financial reporting skills and to present the company’s financial in a better way:

  1. Study the financial reports of other organizations:

To fill any gaps in the report, study the financial reports of other organization to look and observe their practices and cultivate these practices to improve your own.

  • Emphasis on the format:

The format of a financial report has a great impact on the convenience, and so companies must focus on its financial report to make an impact and ease the statements usage and consumption. For example, if a company is inclined towards using the single column balance sheet then it must preferably adopt the same approach for the balance sheet format.

  • Studying the footnotes:

Footnotes on the financial report must be revised in order to ensure transparency and ease in readability. The details and terminology must be provided in proper sequences and appropriate manner.

  • Time management:

Good accountants know how to effectively manage the workload and complete several tasks while being prompt. This ability will help any accountant maintain a healthy work/life balance and be productive.

  • Adaptability and communication:

Accountants who are quick to adapt are off to a great start and can provide better service, plan ahead and enjoy opportunities to learn and try their skills. Most advance professional communicate very well that help the client and their service to be more effective. The ability to move with communication is a great gear for any person.

  • Leadership:

A good leader knows how to mentor and guide the team to improve their operation and ability to meet with their clients demand and keep improving and be more creative and productive.

Financial Accounting Proves to be a skilled Monitor itself for Any Company

Let’s have a look at the most important topic about how is financial accounting important for a company. Now a day the industrial progress of the globe is growing incredibly. Starting from any multinational company to any new-birth one, everyone’s purpose is to secure its profitable financial backbone in quick access. & for this, the department of finance is the top priority to notice. For a company, Financial Accounting can be a good monitor in the field of their business as well as it builds a certain system to count their day to day elevation & demotion.

So what is Financial Accounting?

This is specifically an account report, branch of finance which provides data about companies’ transaction, their position & performance. It summarises the fact & gives investigative data. Its purpose is to make a throughout report of the company’s all transactions & provide its valid commercial upgrades.

It clarifies the economic condition to the other people who are curious to know about the company as investors, clients, employees, competitors, bank, public finance, stockholders if in case they do want to get into the company or simply want to be the part of the organization. So a valid Financial Accounting statement becomes mandatory for all the companies who are trying to expand their field.


Financial account basically supplies judgments of any company regarding finance. Various sources can follow the statement made by the account. Here the term HCA (Historical Cost Accounting) acts a vital role.

A Quick View of how the Financial Statement should be

Something Bearing

The report of the company must be informative about account & no confusion will be allowed strictly on the data. Otherwise, it could misguide whoever follows the report. This might influence about any tie-up companies decision.


The statement is everything in the material world. It guides the users also about taking any decision which is certainly economic. Thus misstatement could be dangerous about the company.

Easily accessible the statement is all about to let knowing other people about the true condition of the company so it should understanding to them. People who want to get efficient info quickly the data must save their time by its easy material & satisfied their curiosity.

Trust Issue

The statement should be trustworthy to anyone who can check it. So there must be no error or any wrong data as it is the source of enlightenment regarding the business of the company. The importance of convincing people is a top priority. So it should be correct from all sides.

Equation over Comparison

Comparison of the clear expression of the details results with the previous one clear the idea of a particular trend. From periods to periods checking the report & the compatibility of it can leads to a conclusion about the subject.

Income Tax Issue

Income Tax is all about how you gain & how you have to pay. For a company, the Income Tax is a very significant part of economic features. But it’s not possible for any organization to calculate theirs throughout details of the gain & loss of a particular time or period. The time duration might be One year, Thirteen weeks, Three months or One month or other duration. The institution can decide the time period. But basically they need solid details. Here to provide what they need Financial Accounting & its Statement is high-priced.

What the Financial Account does for a Company

The Statement of Income (Profit & loss)

It’s all about earning of the company. Mainly it conveys

  • The profit,
  • Expenses,
  • loss,
  • Sales,
  •  Interest & service charges  Salary,
  • Advertisement,
  • SGA(administrative costs)
  • EBIT(Earnings Before Interest & Taxes)
  • The fees for sold goods.
  • Interest
  • Rental fee etc.

The operating & non-operating cost is also there.

It counts gross report of net profit & loss of specific time period.

Sheet of Balance

Balance Sheet is based on a significant calculation which explains the whole matter. Accountability + Equity = Assets. It stated the financial position. When a year ends it needs a whole check-up of how many the assets was that surely compares with the incrimination & capital. The status of the economy can be revealed through the Balance Sheet.

On a specific date total balance, liabilities & all kinds of assets will be count down. The Balance sheet helps to find out whether asserts should have capitalized from shareholder equal-opportunities or it can be taken from a borrowed collection.

The companies have to obey basic format decided by Accounting standard. IFRS (International Financial Reporting Standards) claims the current report of assets & liabilities & non-current funds individually. The part of the current assets like securities in the market, cash, and receivable in particular accounts, everything is in undercount in the Balance Sheet.

The Flow of Cash

The cash flow let anyone know how the affluence & emigration of cash are generally operated for the financial purposes, investments & operating system of the company. Cash flow results from certain changes & impact of balance sheet & income statement. Within a specific period, the input & output of the cash is consistently calculated inflow cash. The formula – Cash Inflow – Cash Outflow + Opening Balance = Closing Balance.

Another Following reason Proper Financial Accounting

  • Assist in figuring out the performance of the company in the commercial field.
  • Assist in deciding about the budget & the projects of upcoming days.
  • Helps to monitor everything of a company on an account basis.

Author Bio:

Evelyn W. Minnick is a very talented online tutor. She graduated with an MBA Degree from the University of Chicago. She has assisted several students and helps solve their doubts in finance, accounting and marketing. She has six years’ experience in her teaching profession and has been regularly blogging with myhomeworkhelp and contributing for some time now. She can be contacted for queries related to this subject.