Table of Contents:
1. What is Financial Accounting?
Financial accounting is a discipline concerned with recording and classifying financial transactions, which include (purchases, production, sales, collection of receivables, settling debts, etc.). These transactions are recorded in the organization's journals and classified into assets and liabilities, to be presented in financial statements such as the Balance Sheet, Cash Flows, and others. Its goal is to reflect a true, accurate, and error-free picture of the organization's financial position to determine the result of the fiscal period, thereby allowing founders, lenders, and investors to make clear decisions.
2. The Concept and Importance of Financial Accounting:
Financial accounting is a branch of accounting specialized in analyzing the financial transactions that a company conducted during the previous financial period. The financial accounting basics rely on:
Creating double-entry inputs: Which contain debit and credit balances, helping to reflect the impact on the accounting process carried out on the company's accounts, whether by increase or decrease.
Providing financial data: The financial accountant provides financial data for making major financial decisions. Additionally, this information helps the company's management determine whether the current strategy is generating sufficient profit or if it needs to be shifted to another strategy that yields higher profits.
Providing financial statements: They offer accurate information about the company's financial position to help investors decide whether or not to invest in the company.
Identifying strengths and weaknesses: Allowing investor companies to evaluate the strengths and weaknesses within the company's financial structure.
Enhancing productivity insights: Financial accounting helps companies understand the daily productivity of employees and the impact of external conditions on that productivity. Furthermore, it assists business owners in determining the methods they will use to motivate employees and analyzing the impact of those methods on daily output.
Assisting in financial analysis: The financial statements prepared by financial accountants aid in the financial analysis of the company’s position and its ability to ensure continuity, as well as determining the company's competitive edge in the markets.
3. What are the Types of Financial Accounting?
Assets are resources controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity.
The Four Main Types of Accounts:
1. Assets:
- Current Assets (Short-Term):
These are the assets owned by the entity in cash form or those expected to be converted into cash during the subsequent financial period, such as: cash in hand and at the bank, inventory (goods), notes receivable (promissory notes), and others.
- Fixed Assets (Long-Term):
These are the assets owned by the entity for the purpose of helping it conduct its activities and use them for several years or multiple subsequent financial periods. The purpose of acquiring them is not for resale, such as: land, buildings, machinery, equipment, furniture, and others.
- Intangible Assets (Long-Term):
These are the assets owned by the entity that lack a physical, tangible substance, such as: goodwill, trademarks, patent rights, and others.
- Other Assets and Debit Balances:
These are other accounts with a debit nature that appear on the assets side of the balance sheet because they represent the company's assets, such as: prepaid expenses and accrued revenues.
2. Liabilities and Equity:
*Liabilities
These represent all the obligations and amounts owed by the entity.
They are divided as follows:
Current Liabilities (Short-Term):
These are the obligations that the entity must settle during the subsequent financial period (less than a year), such as: accounts payable, short-term loans, notes payable (promissory notes), and others.
Non-Current Liabilities (Long-Term):
These are the obligations that the entity must settle over subsequent financial periods (more than a year).
Other Liabilities and Credit Balances:
These are other accounts with a credit nature that appear on the liabilities side of the balance sheet because they represent an obligation on the company, such as: accrued expenses and deferred (unearned) revenues.
*Owner's Equity
These are the accounts that represent the entity's obligations toward its owners (partners), such as the capital account, personal drawings account, retained earnings account, and others.
3. Revenues
These are the accounts that arise when goods are sold or a service is rendered to others.
Examples: Sales Revenue, Service Revenue, Rental Income, Interest Income.
4. Expenses
These are the accounts that arise when the entity receives services from others that help it conduct its activities and achieve its goals, such as electricity expenses, telephone and internet expenses, advertising and promotion expenses, and others.
The relationship between these core accounts can be represented by the following accounting equations:
- Assets = Liabilities + Owner’s Equity
- Owner’s Equity = Capital – Personal Drawings + (Revenues – Expenses)
- Assets = Liabilities + (Capital – Personal Drawings + Revenues – Expenses)
4. Objectives of Financial Accounting:
Here are the objectives of financial accounting that you should know:
- Calculating the net income or net loss generated by the business over a specific period.
- Identifying the assets (possessions), liabilities (obligations) of the company, and the changes occurring to them.
- Aiding internal planning of projects and operations within the company.
- Assisting them in making investment decisions, deciding whether to grant loans, and understanding the company's resources and cash liquidity.
5. What is the Difference Between Managerial Accounting and Financial Accounting?
- Managerial accounting is restricted to the internal reports of the company, whereas financial accounting is concerned with recording the financial transactions and events that occur throughout the period, which are then presented to shareholders and investors.
- Managerial accounting consists of reports through which external and internal disclosures are redistributed and then recorded through financial accounting.
- Example: The electricity bill was paid through financial accounting; it is then distributed among the benefited cost centers through managerial accounting. -
Since managerial accounting does not result in new cash flowing in or out, the company's performance in the annual report is derived from the accounting treatment according to International Financial Reporting Standards (IFRS).
Read more: Accounts Quality - Tax and Accountancy Services Firm in Riyadh
6. Frequently Asked Questions (FAQs) About Financial Accounting: Its Importance and Objectives for Your Organization
1. What are the Functions of Financial Accounting?
The functions of financial accounting are to record, classify, and summarize the entity's financial data and prepare standardized financial statements to primarily provide accurate and reliable reports to external users to assist them in making economic decisions.
2. What are the Duties of a Financial Accountant?
Regularly recording daily financial transactions, performing periodic adjustments (reconciliations), preparing the main financial statements (income statement and financial position) periodically in accordance with accounting standards, and assisting with auditing processes and legal compliance.
3. What is the Difference Between a General Accountant and a Financial Accountant?
A financial accountant is a professional who works within a specific entity and focuses on preparing financial reports for external users. On the other hand, a general accountant (often referred to in a public context) typically indicates a Certified Public Accountant (CPA) who works for an external firm, providing diverse services to the public, including auditing and tax advisory.
7. How Does Accounts Quality Help You Achieve Accurate Financial Management?
At Accounts Quality, we handle all types of accounting without exception, while strictly applying all International Financial Reporting Standards (IFRS) without overlooking any standard. Therefore, Accounts Quality is considered one of the most prominent companies you can partner with to manage your accounts—regardless of the nature of your business activity and requirements—all within highly competitive and well-studied pricing.