An introductory guide to financial accounting for business

Financial accounting is a core part of business operations. Required by law, financial accounting is comprised of a set of mandatory documents. These must be compiled and presented by registered companies in their annual report. Keep reading for our short guide on financial accounting, the difference between financial and management accounting, and the statements required from registered companies.

Financial accounting - explained

Financial accounting describes a part of accounting that records, summarizes, and reports on a business's transactions. Financial accounting is done over specified time periods, mostly a financial year. It can also be applied to shorter timeframes, eg three months, a month, or a week. The outputs of financial accounting are presented in the form of financial statements. A financial statement includes a number of basic financial statements: a balance sheet, an income statement, a statement of cash flows, and possibly a statement of retained earnings. Financial reporting analyzes five metrics: revenue, expenses, assets, liabilities, and equity.

While management accounting is information presented internally to the management team of a company, financial accounting is presented to external parties such as tax agencies or investors.

International financial reporting standards

These are rules and standards defining how accounting events should be reported in financial statements. The standards were published by the International Accounting Standards Board (IASB) and seek to create an international standard for financial statements.

Parts of a financial statement

Balance sheet

Your company's balance sheet will outline assets and liabilities as well as the equity of shareholders. Assets describe cash, inventory, investments, equipment, property, and accounts receivable. Liabilities, on the other hand, includes accounts payable, loans, current taxes, owed payroll, mortgages, and unearned revenue. Last but not least, equity refers to stocks owned by shareholders, retained earnings, or comprehensive income.

Income statement

Your business's income statement, or profit and loss statement, shows your company's net income over a specific time period. You can calculate this by subtracting total expenses from total revenue.

Cash flow statement

This will show a detailed report of your business's income and debts related to cash transactions. These statements are usually divided into three sections: operating activities, investing activities, and financing activities. Cash flow shows the amount of cash your business has available to it at a specific time.

Statement of retained earnings

A statement of retained earnings shows any dividends paid from earnings to shareholders, as well as earnings retained by the company over a certain period of time.