Accounting concerns a system providing qualitative information about finances. It may relate to maintaining of a chronological list of related debits and credits of a business, the statement of transactions and the resulting balance. Accounting methodology or accounting system is a part of a ledger of accounts. The methodology of accounting involves measurement, disclosure or provision of assurance about financial information. This comes of help for managers, investors, tax authorities and such others who take the crucial decisions for resource allocation.
Financial accounting is a branch of accounting and is often considered to be synonymous with accounting. It involves processes by which financial information related to any business is accounted (i.e. recorded, classified and summarized), interpreted and communicated. This relates to the preparation of financial statements for decision makers - stockholders, suppliers, banks, government agencies, owners etc.
In financial accounting the main concerns taken up are the accounting equation (i.e. assets equal sum of liabilities and owners' equity) and the financial statements. The financial statements are prepared based on the trial balance. This trial balance is again prepared using the double entry accounting system. The figures appearing in the trial balance are rearranged and a profit and loss statement and a balance sheet are prepared.
The format of all these accounts is to be determined in conformance with certain standards. The financial statements obtained will show the income and expenditure for the company and present a summary of the assets, liabilities and shareholders' or owners' equity in the company on the date of preparation of the accounts.
Financial accounting is primarily needed to reduce the problems which arise under conditions of incomplete and asymmetric information (wherein one party is better informed than the other) when a principal hires an agent.
The measurements of financial transactions form the essence of accounting. These are the transfers of legal property rights as made under contractual relationships. Non-financial transactions are specifically excluded from the ambit of accounting.
The day to day record keeping involved in accounting is called bookkeeping. The double-entry bookkeeping system lies at the core of modern financial accounting. As per this system at least two entries for every transaction needs to be made- a debit in one account and a corresponding credit in another. The sum of debits should always equal the sum of credits as a rule. This makes it easy to check out for errors.
The object of accountancy is to prepare and provide accurate financial reports which managers, regulators, shareholders, creditors or owners find worthwhile.
