Financial Accounting Definition – Basic Concepts


Basic Concepts Of Financial Accounting :-

Financial accounting is actually meant to keep the records of financial transactions related to certain business operations in the ledgers. These financial transactions reveal the actual state of working of a company to the corned investors, company owners and business owners. Financial ratios are being exercised on the records to know the real standing of business. If a difference is found in the statement or if the accounting records do not comply with the actual inventory and cash account then a company should essentially scrutinize its business operations so that the differences can be eliminated. Some basic financial accounting concepts are as follows:

Types of Accounting:

Cash accounting means a type of accounting that is based on only cash transactions. For example a trader who is used to sell his lamp on credit and he will not account for that particular sale until he gets the cash. Accrual accounting is opposite to the cash accounting. In this method transactions are recorded immediately when they happen. A trader who utilizes this method, he records each and every transaction quickly even if he has not got the payment.

What is Balance sheet?

The assets that can be transformed into cash during a year are called Current assets. Account receivables, checks and the money orders fall in this particular category. While the assets that do not fall under the head of current assets, they take more than a year to get transformed to cash like furniture, buildings etc. financial obligations of a company come under the head of liabilities like bills. Liabilities can be current or long term. The amount of money invested by the owner in the business is called Owners equity and the sum of owner’s equity and total liabilities should be equal to the total assets on the statement of balance sheet.

Why income statement is created?

Net sales refer to the total number of sales that are made by the company within an accounting year. Cost of goods show that how much money has been spent by the company to prepare the goods. The gross income reveals the total money that a company earned within an accounting year. The expenses that have no direct connection in making the goods are known as selling general and administrative expenses. Income that is produced by the company from its operations is called operating income. The profit before tax is known as the Income Before Tax and when the tax is being deducted then it is called Income After Taxes. Net Income is the key motive behind it.

What is Cash Flow Statement?

This statement shows how the cash enters and leaves the different business operations. Cash movement is actually traced through the operations, investing and the last one is financing. This statement is quite handy for judging the cash flow in the business operations.

What is time frame?

Different types of financial statements are made either on quarterly basis or on annual basis and 4 quarters fall in a financial year. So, it is a time frame with in which different statements are being prepared.


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