Finance is the most important part of any business. It has various functions like marketing, management, production etc. We are focused on accounting here. You would come up with numerous topics when you look for online financial accounting. We promise to keep it simple and make it relevant.
Definition
This branch of accounting deals primarily with financial transactions. It is recording of transactions to give an overview of the financial health of an organization. Financial transactions are those business give and takes which involve monetary value. On searching for online financial accounting you would find thatit deals with recording, summarizing, reporting and analyzing such transactions.
What is recording?
Recording is the same as book-keeping. Maintenance of journal, ledgers, trial balance, receipts and payments, etc. are all part of recording of transactions.
What is summarizing?
Compiling all the records from book-keeping to draw up balance sheets, cash statements and other income statements is summarizing of the records.
What is analyzing?
As the name suggests, it is drawing up logical conclusions from the reports drawn up. Studying ratios is a major part of this step.
What is reporting?
This is the last step of the accounting process. After summarizing the reports, it is imperative that they be reported to stake-holders.
Methods
There are two major methods of performing financial accounting. They may be used individually or combined together. On researching for online financial accounting, we observed that wisdom is in using accrual for liabilities and cash for income. They are: –
- Accrual Method
In this method, the transactions are recorded as and when they occur. The revenue generated, however, needs to be recognizable.
- Cash method
The revenues and expenses are recorded only on exchange of cash or other monetary worth.
Objectives of financial accounting
Following are the relevant objectives of financial accounting as mentioned in various definitions.
- Keep a track ofmonetary information
- Make it available to external and internal parties
- Give an unbiased outlook of accounts
- Help external parties make decisions regarding investment
- Delivering final accounts
Purpose of financial accounting
You would notice that the objectives and purpose of financial accounting are quite similar. However, they are not the same. The purpose as per online financial accountinghelp sites are:
- Preparation of relevant reports
- Reporting the firm’s performance to external parties
- Following GAAP to deliver proper records
Financial accounting vs. Managerial accounting
You would think that accounting is maintaining books, no matter who does it. However, the major difference is in the end user of those books. In managerial accounting, the books and reports are drawn up for internal usage when looked up in online financial accounting. They are prepared to help managers make internal decisions. Unlike this, financial accounting is carried out by external accountants for external stake holders such as creditors, lenders and shareholders.
Importance of financial accounting
Finance is important to any business, may it be big or small. When going through the various online financial accounting results you would see that it is important for both small as well as big business owners.
- Recording transactions
The primary function of this accounting as stated earlier is to record information in way of transactions. It is also the most important part of accounting. Also, termed as book-keeping, the practice is used by all firms. It could be a small time store or a big enterprise.
The usual system used is the double entry system which means that each and every transaction affects two accounts simultaneously. In cash method, always one of the accounts will be either a cash account or a bank account. However, with accrual system, there is no such compulsion. Online financial accounting help suggests that both should be used in combination.
- Communication of information
The users of financial information are both internal and external. Internal users are finance team, managers, employees etc. They are interested in monetary information to carry out the function of financial management in an effective way.
Financial information would also interest the employees who were awarded Employee stock options. Financial information plays an integral part of controlling in financial management. It is this information which aids in focusing on corrective measures.
In the same way, external parties are also interested in gaining knowledge of an organization. The external people are interested in the financial information, but are not a part of the organization. They are lenders, banks, suppliers, etc. The basic interestas per online financial accounting of external parties is to know the overall health of an organization.
- Analysis
It can be used to understand one’s own growth over a specific period. Reporting makes a powerful tool with various ratios to understand the health of a firm at a given time.
- Comparison
Because reports are always drawn up as per GAAP, it can aid in comparison among various firms of the same organization. These can in-turn help with investment decisions. Also, comparison can be made among different period profitability of the same firm.