It is considered essential for a registered company to review the performances and needs of their firm over a financial year. This is the main reason Financial Accounting Services are an important part of a firm, as they check the financial transactions that occur in a company. Your mind may come up with a crucial question about why Financial Accounting Services matter or about the Principles of Accounting Services. The Significance of Financial Accounting Services in Business is very broad, which will be the main focus of this blog.
Definition of Financial Accounting
Financial accounting helps the organization assess the overall economic condition and diagnose and resolve issues simultaneously. This is the main reason why financial accounting services play an inevitable role in maintaining the records and statistics concerning a company's transactions. To avoid confusion and uncalled efforts, the status of the expenses, information management, and reports must be filled out carefully, which is the role of a financial accountant, which is crucial in such documentaries.
There is also a set of guidelines that are to be followed by Financial Accounting Services according to the doctrine of the Financial Accounting Standards Board (FASB). These are also known as Generally Accepted Accounting Principles (GAAP), produced to provide ease, credibility, and uniformity to the accounting processes across companies.
How are the records of the financial transactions done?
Recording financial transactions is a crucial task that falls under the pivotal wheel of financial accounting services. Accounting Records are generally done in two forms, which are mainly described as single-entry and double-entry methods. As indicated by its name, the single-entry method is considered a simpler method that works better for operations concerning small tasks.
However, the double-entry method is considered a more complex method of accounting and requires two entries. The two entries include one credit and one debit for every business transaction. The main objective is to balance the books and account for the movement of cash through an organization, which is primarily a large corporation. A large corporation is sought largely for spotting errors and potential fraud, which may turn out to be harmful to a company.
The other specific types of accounting records that are reviewed consist of the transactions, the starting point for any accounting record and journals, and a record of all the transactions made by a company. The general ledger is defined as the movement of transactions in the journal to designated places that are outlined by the type of transaction. Trial balances include the summation of all credits and debits within the business cycle, and at last, a company's financial statements comprise the final document that includes the components of all the other accounting documents.
Types of Financial Accounting
There are two types of financial accounting that one needs to be well known, and these include:
Broadly defined as a type of accounting method where receipts of payment are recorded during the period in which they are received, and the expenses are recorded in the period in which they are paid. Thus, revenues and expenses are recorded when cash is received and paid, respectively.
Accrual Accounting is an accounting method that recognizes revenue in the period in which it is earned and realizable. It does not necessarily mean that the records are made when the cash is received. Similarly, expenses are recognized in the period in which the related revenue is acknowledged instead of when the corresponding money is disbursed. This method of accounting is based on the matching principle, which puts forward that all revenue and expenses must be reported in the same period and 'matched' to determine profits and losses for the period. Accrual Accounting is often compared against Cash Based Accounting, the difference of which lies below:
Cash Accounting vs. Accrual Accounting
Cash Basis Accounting is defined as the method when revenue is reported on the income statement only on the grounds of when cash is received. On the other hand, accrual accounting is defined as the accounting method that accounts for revenue when it is earned. The accrual method differs from the cash method by recording revenue upon the delivery of a product or service to a customer and anticipating future payment. Thus, it can be stated that money is accounted for before it is received, thereby putting forward that the main difference between accrual and cash-based accounting lies in the timing of when revenue and expenses are recognized.
Principles of Financial Accounting
There are five accounting principles, which include the following:
Revenue Recognition Principle
This revenue highlights the period when revenues are recognized through the company's income statement. If your company is on an accrual basis, your revenues will be recognized in the period that the services were provided. If you are on a cash basis, the revenues will be recognized when the cash is received.
This refers to the principle that refers to recording your assets at their original cost rather than the current market value. By adhering to this principle, you can properly record depreciation for purchased assets. You can also prevent overstating business assets and present a more accurate picture of its financial position.
This principle refers to the expenses that should be matched to the revenues recognized in the same accounting period and recorded when the expense was incurred. If there was a time when sold revenue was recognized, then the cost of those things should be recognized, too.
This accounting data should consistently stay accurate and be free of opinions constituting personal views. One should ensure that the data is backed up by evidence, which can include vouchers, receipts, and invoices to maintain a consistent flow.
Full Disclosure Principle
Financial statements should be accurate and not of a misleading nature, thus making stakeholders aware of relevant information concerning the company's finances. This transparency will help build trust with your company's stakeholders.
Significance of Financial Accounting
Below are the following factors supporting financial accounting’s significance:
Financial accounting permits companies to place their financial status to outside parties, which is integral to conducting business deals. For companies to thrive, external accounting is needed to qualify for loans and coordinate with suppliers, which is why financial accounting is a very significant aspect of a company.
Internal communication, too, is important because it will give the employees an idea about how the company is doing, thus knowing the stability of their jobs. A concrete idea of the company doing well would ensure the employees of no layoffs or downsizing. Therefore, this is another way in which companies use financial accounting for internal communication.
Relating Financial Reports
Another significant part of financial accounting lies in helping businesses evaluate their success in terms of comparison to other businesses. This allows businesses to analyse their success compared to their competitors and open up areas for improvement.
Financial accounting allows businesses to keep a detailed record of business transactions, which is also known as bookkeeping. This helps companies keep track of their expenses and stay organized.
Abiding Tax Laws
Financial Accounting does not merely help a business but is also essential for complying with regulations and avoiding legal issues. Especially beneficial in regards to business taxes, it is considered beneficial to have all financial information well-organized when filing taxes. However, they should be aware of tax compliance, too, as not paying attention to it may create a lot of issues.
Financial accounting helps companies create budgets and also helps companies determine in which areas they need to invest more than any other area. Financial accounting also helps companies make projections about the future, and by analyzing your company's current and past financial performance, you can predict your next business year.
Therefore, make sure you put an integral amount of your time into financial accounting, as it not only gives a synopsis of your finances but also helps you in other sectors. It also shifts your attention to more important matters and acts on them, thus enabling your company to make profits.
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FAQs (Frequently Asked Questions)
Why need a financial accountant for tax regulations when I can solely look up at it by myself?
Although you are a jack-of-all-trades, having a financial accountant will help you know more than the heading of a new tax regulation and also help you act on it calculatively.
Are Financial Accounting Services prone to make mistakes?
Your financial account will only make mistakes if the data you provide isn't correct. Therefore, make sure not to give any wrong data to your accountant, which will help you avoid mistakes.
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