Financial accounting has an important role that is needed in every company. Financial accounting can help in the decision-making process related to the company’s economics and finances. In relation to management tasks, accounting plays a particular role in monitoring and planning functions.
Finance is the heart of the company so every transaction that occurs must be clear and transparent. This will make it easier for companies to know the exact amount of turnover. That is why financial accounting is very necessary for the continuity of the company.
So that you understand it better, here is a short discussion about financial accounting and several things related to it.
Understanding Financial Accounting
Financial accounting is a part of accounting that is related to preparing reports for external parties such as shareholders. Financial accounting is closely related to the problem of recording company transactions and preparing periodic reports from the recording results. The main principle used is the accounting equation of assets equals liabilities plus equity.
Currently, accounting is an important reason for many people to study it, especially entrepreneurs. Of course this will be very profitable for their business. Apart from that, many students, especially university students, take this major because job opportunities in this field are very wide open and have a promising future.
Understanding Financial Accounting According to Experts
- Kieso & Weygant (2000)
Financial accounting is the process of preparing comprehensive company financial reports that will be used by users of financial reports from internal and external parties to the company.
- Sugiarto (2002)
Financial accounting is a field of accounting that focuses on preparing financial reports which is carried out in stages in each company. This report is a form of management accountability to shareholders and investors. The accounting equation applied refers to Financial Accounting Standards, namely Assets = Equity + Liabilities.
- Martini (2012)
Financial accounting has an orientation towards reporting from external parties. With so many external parties having detailed objectives for each party, the party making financial reports is based on principles and assumptions in the process of making financial reports.
- Warren Reeve Fees (2008)
Financial accounting is the process of recording and reporting data as well as a company’s economic activities. The report will produce key reports for owners, creditors, government agencies and the general public although the report information is very useful for managers.
- Jogianto (1997)
Financial accounting is providing relevant information related to periodic reports in the form of income statements, balance sheets, retained earnings, reports on changes in capital from internal and external parties of the company as material for consideration in making management decisions.
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Main Functions of Financial Accounting
Financial accounting has the main function, namely providing information related to the financial condition of a company. The company’s financial condition can be seen through the financial reports that are prepared so that it will reveal any changes in every transaction that occurs within the company.
Thus, financial information about a company will be very useful for management decision making which can influence the company’s future condition.
Apart from companies, financial accounting can also be used in micro, small and medium enterprises such as MSMEs through practical and theoretical approaches described in the book Practical Approach to MSME Financial Accounting .
Some General Accounting Functions
Here are some general accounting functions that you need to know:
- Provides a series of useful information for the company.
- Know and calculate the amount of profit and loss obtained by the company.
- Assist in determining the rights of each party, both internal and external parties with an interest in the company.
- Supervise and control all activities related to the company.
- Help achieve company targets as determined.
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Types of Financial Reports
In a company, financial reports are important information regarding the financial condition that is used to see the company’s performance in a certain period. Compiling financial reports will provide actual data that will facilitate the development of a company.
To simplify company activities, companies generally integrate financial accounting with management accounting which can provide more comprehensive results.
The following are the types of financial reports that can be studied and applied to companies.
1. Profit and Loss Statement
The profit and loss report is part of a company’s financial statements for a certain accounting period. This report will describe the elements of the company’s income and expenses which will later produce profits and losses.
Apart from that, the profit and loss report aims to determine the amount of profit or loss generated by a company. The income statement is also used to calculate the estimated taxes that must be paid by the company.
As well as being used as an evaluation reference for company management and providing information about the appropriate steps that need to be taken if the burden incurred by the company is greater.
The income statement consists of two forms, namely:
- Single Step
In the single step form, implementing account flow and grouping is easier to do. This is because in the income statement the placement of income and profits is at the beginning of the report. Then proceed with the costs and expenses borne by the company. Furthermore, what determines a company’s profits or losses lies in the difference between total income and total expenses.
- Multiple Step
Meanwhile, in a multi-step income statement, operational and non-operational transactions must be separated while comparing costs and expenses with related income. The report form also shows the difference between ordinary activities and activities incidental to operating profit.
2. Balance sheet
This type of balance sheet report consists of a systematic list of assets , liabilities and capital ( equity ) within a certain time period. The balance sheet usually consists of two forms, namely horizontal (account form ) and vertical ( report form ).
In general, the balance sheet financial report aims to show the condition, position and financial information during a certain period. This financial report will describe the company’s financial position over a certain period of time. At the end of this report it will show the position of assets, debt and capital which creates balance.
By knowing what types of financial reports are, it will make it easier for companies to prepare appropriate steps for financial reports. The following are the three main elements in a balance sheet report:
- Asset
Assets are assets owned by the company and are usually used in the company’s operations. Assets will provide value to the company in the future. An example of an asset is a building used in company operations.
- Liabilities
Liabilities are debts that must be repaid during a certain period. This debt consists of Current Liabilities and Long Term Liabilities . Liabilities are also referred to as the opposite of assets. If assets are property ownership while liabilities are obligations.
- Equity
Equity or capital is the assets owned by the company. Equity is also ownership of company asset rights where net assets are obtained from total assets minus liabilities. The three can be connected through the equation Assets equal Liabilities plus Equity.
3. Capital Change Report
The capital changes report is a financial report prepared to show changes in increases and decreases in assets within a certain time period. This change can occur because the capital used continues to experience turnover, as well as increases in profits and use of capital for the benefit of the company.
The elements of the capital changes report are:
- Initial capital
- Profit and loss
- Private
- Additional capital
4. Cash Flow Statement
Cash flow report or also called cash flow which functions to determine the turnover of a company’s flow of funds. This aims to provide information as well as control funds or cash going out and cash coming in to the company during a certain period.
The cash inflow report can be seen from the results of operational activities and cash obtained from funding or loans. Meanwhile, cash outflow is seen from the total costs incurred for certain operational activities and investments.
Based on the explanation above, we can conclude that financial reports can be useful and influence a company’s financial performance.
Stages in Learning Financial Accounting
- Identifying Transactions
Identifying transactions that can and cannot be recorded. Transactions that can be recorded have evidence such as receipts, notes, invoices, proof of cash out, and so on.
- Analyzing Transactions
Transaction analysis aims to determine its effect on financial position. Usually use the equation assets = liabilities + equity.
- Recording Transactions in a Journal
A journal is a record that contains the chronology of transactions in an accounting period. This process is called journaling which consists of general and special journals.
- Moving the Journal to the Ledger
Transactions that have been recorded in the journal then move the records to the ledger. A ledger is a collection of bookkeeping accounts used to record asset information.
- Preparing a Trial Balance
A trial balance is carried out to ensure that the number of debit transactions and credit transactions must be the same. If the amounts between the two are not the same then it can be said that the trial balance is not balanced.
- Making Adjusting Journals
Making adjusting journals functions to achieve balance in the financial statements. If there are several transactions that have not been entered or an error occurs when calculating, an imbalance will occur.
- Creating a Trial Balance After Adjustments
The adjusted trial balance in the general ledger into a new trial balance. This process must show that the balances in the asset and liability groups must be balanced.
- Preparing Financial Reports
After the balance reaches equilibrium, the next step is to prepare financial reports. Financial reports can be prepared as follows:
- Income statement
- Statement of changes in capital
- Balance sheet report
- Cash flow statement
- Preparing Closing Journals
Closing journals are only prepared at the end of the accounting period. Accumulated revenues and expenses are reported at the end of the period. This aims to ensure that income and expense accounts are not mixed up in the next period. - Making Readjustments
By making readjustments the aim is to ensure that all income and expense accounts have been closed and ensure that the balance sheet is balanced to continue opening the books for the new period.
Introduction to Basic Accounting
A Brief History of Accounting
Accounting was born through the figure Luca Patiolo who was later dubbed the father of accounting in 1494. Then accounting was further clarified through books that discussed recording and bookkeeping known as the double entry system, debit-credit in a book entitled Summa De Arithmatica, Geometrica, Proportioni et Proportionalita .
The development of accounting was more rapid in European countries until it became known as Conventional Bookkeeping, which was inspired by a book by Luca Paliolo. Initially there was only one bookkeeping system, namely a single bookkeeping system. However, because complex needs arose, pair bookkeeping emerged.
Basic Accounting Equation
The basic accounting equation is the relationship between assets, capital and debt of a company. This basic accounting equation is intended as a basis for recording the accounting system.
What is meant is that every time a transaction process occurs, it must be recorded according to two aspects, namely assets and liabilities.
Therefore, the meaning of the basic accounting equation is a balance between the assets and liabilities which must always be maintained as a result of changes in financial transactions. The basic forms of accounting equations in general are:
Assets = Debt + Capital
Debt = Assets – Capital
Capital = Assets – Liabilities
Assets + Expenses = Liabilities + Liabilities + Income
Intermediate financial Accounting
Intermediate financial accounting is a continuation of the introduction to basic accounting. In intermediate accounting, you will learn about cash/cash equivalents, bank reconciliation, short-term investments, receivables, inventory, tangible and intangible fixed assets, long-term investments, short-term debt and equity accounting as well as retained earnings.
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Advanced Financial Accounting
Advanced financial accounting is accounting that discusses the preparation of consolidated financial reports, as an implication of ownership and control of company investments.
Advanced financial accounting provides more understanding regarding the concept of business combinations, accounting treatment of investments in equity instruments, making elimination journals and preparing consolidated reports based on financial accounting standards.