define financial accounting

define financial accounting

The Importance and Principles of Financial Accounting

1. Introduction to Financial Accounting

There are many things you might want to do in launching your business, a substantial number of these things embody the use of money. At the start-up stage, you’ll be buying and setting up office or retail space. Regardless of the nature of your business, you’ll have many operating expenses to be paid before the business provides the sale that generates the income to cover the costs. Part of your juggling act as an entrepreneur is the need to keep track of financial resources and changes in financial position. We know from time-honored experience that sophisticated financial accounting systems lay in not currently required nor wanted in small start-up businesses. However, every business does need to have some form of financial accounting system, no matter how simple or non-sophisticated.

Welcome to the demo on the importance of financial accounting. I’ll share with you some specific examples of problems that arise because of the lack of financial accountability, and I’ll also take you through some basic financial principles that underlie financial accounting. Suppose you’ve made the decision to invest your business effort in a new business venture. As an entrepreneur, you’re faced with a delicate juggling act. In the early stages of business, you need to be continually on the lookout for signs of changing market and operating conditions. At the same time, you also need to establish some form of organized system that provides you with financial information about the venture. The difficulty, of course, is in knowing when the time is right to trade off your time devoted to gathering financial information for time spent learning about your start-up operation.

2. Principles and Standards of Financial Accounting

Several diverse elements are related to business operations, and standard-setting bodies hold these principles in place. Accounting principles derive from authorities such as the Securities and Exchange Commission and the U.S. Financial Accounting Standards Board. The Financial Accounting Standards Board, or FASB, issues the rules and regulations of financial accounting. These principles guide accountants in the preparation of financial reports. Although the Securities and Exchange Commission (SEC) does not make the accounting rules, this federal agency has the significant responsibility for determining that firms that offer securities to the public set their financial statements using the generally accepted accounting principles. The SEC also supervises private regulatory groups and publicly traded companies. Because of their broad reliance on financial statements, the FASB and the SEC have the most power to stipulate accounting principles in the United States.

In every field, typically accepted principles are put in place to help ensure the honest and appropriate use of information. There are several precise accounting principles and standards that provide assistance for financial disclosure and accounting professionals in preparing financial reports. Established accounting principles help offer useful information to several different groups who have varying information requirements. Most countries have their own particular accounting principles that aid in the preparation of general-purpose financial statements that are relevant to user needs. In this course, you will learn about U.S. accounting standards that are available through the Financial Accounting Standards Board. These standards strive to supply consistent information that is useful to financial statement users.

3. Key Financial Statements and their Significance

The significance of financial statements To make rational economic decisions, people need to be able to evaluate organizations’ performance and capabilities. These assessments typically require information about the organizations’ financial condition. For the most part, the data needed to make these important assessments is contained in these four financial statements. Not everyone uses the information in the financial statements. Investors and creditors, however, depend on companies’ financial statements for much of their information and analysis. When the company performs well, the value of its stock is likely to rise, making investors wealthier. On occasion, a company is so profitable it may choose to save some of its profits in the company (retain them) for investment in future projects.

The key financial statements At the end of each accounting cycle – each accounting period – a company produces the income statement, the statement of retained earnings, the balance sheet and the cash flow statement. Each of these statements provides different yet complementary information about the company’s operations, financial position, cash flows and use of resources. Collectively, these statements make up the financial statements, a company’s principal means of reporting information about its financial condition.

4. Role of Financial Accounting in Decision Making

The importance and principles of financial accounting are not only crucial for society but also for your understanding. Proper use and understanding of these aspects of financial accounting are essential. Financial accounting information is used by both parties inside and outside an organization. Management, at all levels, uses financial accounting information in making decisions. Financial accountants, because of their unique perspective, provide immediate information, and because of the inherent flexibility of the accounting system, have an extraordinary advantage in refocusing this type of information and reshaping it for future use. The decisions management makes affect the organization’s relationship with employees, creditors, regulatory agencies, stockholders, and potential investors. The criteria used to communicate accounting information must be readily understood and consistent across different organizations to facilitate interpretation and comparison. The better the users understand the information, the more useful they will make it.

Financial accounting information helps decision makers in evaluating the financial position of an organization. The material contained in the income statement and balance sheet is used as a basis for many of the financial measures summarized in the statement of cash flows and in financial ratio analysis. This information serves both as a tool for assessing the organization’s financial condition and as a basis for prospective planning. Decision makers outside an organization are also attributed to this function. They include government, investors, financial institutions, security exchange commissions, and nonprofit organizations. Financial accounting is a means to improve the operational outcome of the enterprise. It provides management and investors with valuable information that supports their decisions about business activities. These decisions are made for future operations, investment, borrowing, lending, and management that affect enterprise operation and financial structure.

5. Emerging Trends and Technologies in Financial Accounting

The activities demanded from the parties that manipulate information for accounting purposes grew complex over time. This volume and complexity have only increased with globalization and technological support. Studies and techniques on data mining, information retrieval, and decision support systems have shown increasing use in the financial sector both for the banking industry and for providing management accounting information. The role of the price of securities for the overall function of the economy is well known to specialists in the field. In addition, the evolution of the financial markets in recent years has led to the use of a growing number of investors in the financial markets in the process of making business administration decisions.

1.1 The data in accounting and financial statements have to be examined, analyzed, interpreted, and then presented in a two-way information through an improved and advanced computerized technology. Data mining tools can provide solutions for traditional financial accounting problems, as mentioned in previous sections. Among the most used data mining techniques at present, we would like to mention decision trees-aided, clustering, k-means algorithms, linear regression, and Naïve Bayes. Legislation on stored and through-the-internet also facilitates the development, management, and preservation of the required audit trail and backup for all data. Moreover, these can be employed in real-time in solving tasks related to the preparation thereof.