What is Financial Accounting

In recent years, accounting has been divided into different types; arguably the most important

type of accounting.

Today’s Post is showing at what is financial accounting.

Financial Accounting

Financial accounting is the process of gathering and summarising financial information to prepare financial reports of an entity.

All entities are required by law to provide financial reports, which cover the entire

transactions and activities of an entity during a year.

The legal reports an entity has to provide includes; the income statement, the balance

sheet and the cash flow statement.

It should be noted that different countries have or use different accounting standards

and formats.

For example, entities in the United Kingdom use UK GAAP, where the United States use the

USGAAP and other countries use IFRS or other recognized standards.

Financial accounting is provided for the users outside of an entity. These include potential

shareholders, tax authorities, and creditors.

And known in the previous video called “Who are the users of accounting information”

as external users.

As well, the main purpose of financial accounting is to evaluate the past performance of an

entity.

This is Example Time! This is where we put the theory into so-called real-life examples.

This is to try and increase your understanding of the topic or theory.

A shipping company called Busy Boats have recently published the financial statements

for the year and Sue wants to invest in some shares.

She can use the financial reports like the income statement to look at the performance

of the business during the year.

She may also want to look at the financial and cash position of the business in the balance

sheet and cash flow statement.

If Sue has access, she may want to compare previous years of financial reports and analyze

whether the performance has improved and see if the financial and cash position experienced

growth from previous years.

Then after analyzing Sue will have to decide whether the company is good to invest in.

So that was the explanation of financial accounting. If you enjoyed it, press the like button.

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