Hello dear, welcome to basics and introduction of Accounting and Finance! Maybe you have never studied account or finance or it is the first time you are trying to understand the basic ideas about this subject. On the other hand, you maybe know so many things about it. Well, no matter who you are or what you know about Accounts and Finance. But the important matter is that you need to realize what the primary accounting concepts are. If you don’t know the basic concept then you may face trouble continuing this subject.
On the other hand, once you realize the meaning and the basic concept of Accounting and Finance then you will be able to reach just about any business or accounting concept. We have chosen this topic to provide you with an overview of financial accounting basics for all the people and it’s really important to understand because it will help people have a better understanding of how businesses handle their finances.
You know having a better realization about how businesses gain a profit helps people to make greater decisions regarding investments, and other financial concepts. So every common people should understand the basics of accounting and personal finance which helps a non-accountant to keep recording financial information about a business.
If you know the basics of accounting principles, concepts and technicality then you can easily deal with identifying business activities, like sales to customers, record these activities, communicate with people outside the organization with financial statements.
Accounting can help any organization to understand how much money is coming in and being spent. And you know without accounting info there is no way to predict revenues, expenses, assets, liabilities, income statement, balance sheet, and statement of cash flows for any organization. In another word, without helpful accounting information, no organization can hope of effectively expanding and maintaining that expansion.
Financial accounting is a specialized subsection of accounting that focuses on collecting information about an organizational financial statement in order to present it to outside users in a recorded, summarized, and presented form. So, financial accounting’s main purpose is to provide useful information to the users or groups outside of companies and which allows them to know if the organization is making or losing money. I know you will agree with me that this information is essential in determining if a company is able to maintain profitability.
The ultimate goal of financial accounting is to increase their profits, minimize their expenses and expand their market share by providing useful, financial information to people or external users outside of companies. And this financial information helps the external users to make decisions about the company.
A financial statement is a collection of a formal report of the financial results and condition of an organization, person, or other individuals.
You know there have four main financial statements:
1. Balance sheets
2. Income statements
3. Cash flow statements
4. Statements of shareholders’ equity.
The balance sheet is also referred to as a statement of the financial position of an organization that summarizes a company’s assets, liabilities, and stockholders’ equity at a specified date. These three balance sheet is really important for external users because these balance sheets provide the financier an idea as to what the company owns and owes, as well as the amount invested by shareholders.
As I said the balance sheet helps investors to understand the position of a company. And the first section of the balance sheet represents the organization’s assets and where to have such things as cash, accounts receivable, inventory, prepaid insurance, buildings, and equipment.
The next section is about the organization’s liabilities. It is just like assets, there are current and noncurrent liabilities. Current liabilities illustrate payment obligations your organization has to pay within 12 months of the date on the balance sheet. On the other hand, noncurrent liabilities mean the amounts that your organization has more than one year to pay.
And the final section is stockholders’ equity, defined as the difference between a number of assets and a number of liabilities.
The income statement presents a company’s financial results of extensive income, statement of revenue & expense, profit and loss report for a stated period of time. It is also denominated as a profit and loss statement, statement of earnings, statement of operations, or statement of income.
Anyone can use an income statement to generate revenue and expenses to stay in business. And it will help you to understand your organization’s profit and loss over a period of time. This statement allows small business owners to understand and check out which field of their business is over or under budget.
Cash Flow Statements
The statement of cash flows is one of the main financial statements that track the sources of a company’s cash and how, where, and when money enters and exits a business that was spent over a specified time period.
The statement of cash flows is part of the financial statements issued by a business and provides information about cash receipts, cash payments. Its particular focus is on the types of activities that create and use cash, resulting from the operating, investing, and financing activities of a company during the period.
The cash from operative activities is compared to the company’s net income. If the money from operative activities is systematically larger than the net income, the company’s profits or earnings are said to be of a “high quality”. If the cash from operative activities is a smaller amount than profits, a red flag is raised on why the reported profits aren’t turning into cash.
Statements Of Shareholders’ Equity
The statement of shareholders’ equity is a financial report that shows the changes in shareholders’ equity of all major company issues as part of its balance sheet during a period. The statement provides additional messages to readers of the financial statements regarding equity-related activity from the beginning of a given accounting period to the end of that period.
In other words, shareholders’ equity is decided by calculating the difference between a company’s total assets and total liabilities.
In summary, we just describe some basic notes about account and finance. There have a lot of things you need to learn step by step. But learning this short and basic thing of the elements of the financial statements provides an organization’s stakeholders with business statements and also allows them to know if the organization is making or losing money. If you realize the fundamental things of Financial Accounting then you will be able to understand easily the business transactions.
Magalie D. is a Diploma holder in Public Administration & Management from McGill University of Canada. She shares management tips here in MGTBlog when she has nothing to do and gets some free time after working in a multinational company at Toronto.