Principles of Financial Accounting

Financial accounting is one of the fields in the accounting system that treat money as a medium of measurement for the performance of economy rather than as a production factor.

It embodies the whole system of monitoring and control, specifically the money coming in and coming out in an organization. Money can be expenses, revenues, liabilities or assets. The term financial accounting mainly focuses on the organization’s finances that have to be accounted.

Financial accounting is also the system of gathering and summarizing all data in finances to prepare it for the financial report. An example of a financial report is the statement of income from the organization’s own management, its lenders, the investors, stakeholders, its suppliers and also the tax authorities.

The sole purpose of financial accounting is to give all the necessary information needed to establish a stable economic decisiveness.

Preparing financial reports that provides all the information about the organization’s performance and its outside party is important.

Unlike managerial accounting that only focuses on the internal matters of an organization and the rules set by the standard setting authority, financial accounting is likely to be performed according to the guidelines of the GAAP.

Certified public accountants are the professionals who prepare these financial reports. To be a certified public accountant, one must have one hundred fifty credit hours of work.

In these credit hours, 36 of these credit hours must be accounting. Only ten percent of the total examiners that take the exams to become a CPA pass it on their first try.

Accounting also has a standard to follow. In order for a financial report like financial statement to be fair and consistent, it must be prepared according to the principles of accounting standard. Such standards are called Generally Accepted Accounting Principles or GAAP.

Many small scale businesses use a system of accounting that recognizes expense and revenue on a monetary basis. It means that neither the expenses nor revenues will be recorded until the monetary value that is linked with them is received. On the other hand, large scale businesses use a system called accrual method.

For the accrual method, expenses and revenues are recognized immediately based on the time they are incurred or earned. An example of this accrual method is when the customer is given an invoice even if the payment is not yet received. It goes the same for expenses. The bill is recognized immediately even if the payment is not made.

Another example of financial accounting using the accrual method is the salary of employees in a certain company that is paid for the next accounting period even though they performed their work near the end of the present period.

The expense of the company will still be recorded for the present period since the present period is where the expense incurred.

Financial accounting greatly relies on assumptions, principles and modifying convention. For the financial accounting to be a reliable, these concepts must be followed and it must be conducted by a reliable and honest professional.