Why financial accounting is important?

Financial accounting is a specific branch of accounting involving the process of recording, summarizing and reporting countless transactions resulting from business operations over a period of time.

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Why financial accounting is important?

Financial accounting is a specific branch of accounting involving the process of recording, summarizing and reporting countless transactions resulting from business operations over a period of time. These transactions are summarized in the preparation of the financial statements, including the balance sheet, income statement and cash flow statement, which record the company's operating performance within a specified period.
The role of financial accounting:
The registered company has the primary responsibility for reviewing performance, progress and needs to improve the company over a financial year. This helps the organization to assess the overall economic situation and diagnose and solve problems simultaneously. This is precisely why accounting plays an inevitable role in maintaining records and statistics regarding the company's transactions every year. The status of expenditures, information management and reports must be submitted immediately to preserve confusion and efforts that may not be justified, later. The financial accountant's role is crucial in such documents.
Main Sockets Financial Accounting
Financial accounting is the framework for financial record-keeping rules, processes and standards.
Nonprofits, companies and small businesses use financial accountants to prepare their books and records and create their financial reports.
Financial reports are prepared through the use of financial statements such as balance sheet, income statement, cash flow statement and statement of changes in shareholders' rights.
Financial accounting differs from management accounting (or cost accounting) as financial reporting is more for reporting to external parties while cost accounting is more for in-house strategic planning.
Financial accounting can be done according to the accrual method (recording expenses for items not yet paid) or according to the monetary method (only cash transactions are recorded).

Types of financial statements

Income statement is a document of income, expenses, profits and losses generated by large companies in a period of time. Other names of these documents are "Statement of Profit and Loss", "Statement of Net Income" and "Statement of Profits". It is crucial in tracking growth ranges, analysing rises and declines in data and taking action to fix them. The income statement is used internally (between managers, managers and employees) and externally (for trading between creditors and investors). The content of the statement includes income, expenses, overall income and cost of goods sold (COGS).

Balance Sheet

Balance sheets serve as proof of the company's credibility. The contents of this paper contain assets, liabilities and property rights. Assets can be traded or fixed based on their convertibility, whether tangible or intangible based on presence, operation or non-operation. Revenue can be current or non-current. The difference between the two is that the former is short-lived such as interest and loans and the latter is long-term such as taxes and bonds. Equity refers to the company's net value of shares and investments. Shareholders' rights can be positive (where assets exceed liabilities) or negative (where liabilities exceed assets).
Statement of cash flows
A cash flow statement is a record of liquidity, the holding of cash held, and an indicator of changes in assets, liabilities or equity, if any. There are three sections in this statement: operational activities, investments and financial activities.
The cash flow of operating activities shall record the amount due in respect of employees' wages, interest, taxes and related transactions.
Investment cash flow includes transaction records in the purchase of assets or loans and profits and losses made for investment purposes.
Cashflow financial activities demonstrate debt repayment, share repurchase, equity and profits.
Income lists
The income statement covers a time range, a year for annual financial statements and a quarter for quarterly financial statements. The income statement provides an overview of income, expenditure, net income and earnings per share.
Operating income is revenue from the sale of the Company's products or services. The operating revenue of the automotive manufacturer will be generated through the production and sale of cars. Operating revenue is generated from the company's core business activities.
Non-operating income is income earned from non-core business activities. These revenues fall outside the company's core function. Some examples of non-operational income include:
  • Interest Earned on Cash at Bank
  • Rental income from property
  • Income from strategic partnerships such as royalty receipts
  • Income from the offer of an existing advertisement on the company's property
Other income is income earned from  others activities. Other revenues can include gains from the sale of long-term assets such as land, vehicles or a subsidiary.
Basic expenses are incurred during the process of earning revenue from the company's core activity. Expenses include cost of goods sold (COGS), sale, general and administrative expenses (SG&A), consumption or amortization, and R&D.
Standard expenses include employees' wages, sales commissions and utilities such as electricity and transportation.
Expenses associated with secondary activities include interest paid on loans or debts. Losses from the sale of the asset are also recorded as expenses.
The main purpose of the income statement is to convey details of profitability and financial results of business activities; However, it can be very effective in showing whether sales or revenues increase when compared over multiple periods.
Investors can also see how much the company's management controls over expenses to determine whether the company's efforts to reduce the cost of sales may boost profits over time.

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