Financial Accounting
The process of identifying, recording, summarizing & analyzing an entity's financial transactions and reporting them in financial statements to its existing & potential investors, lenders and creditors.
The accounting cycle
A record of a transaction. In the accounting cycle, there are 3 types of entries:
- Journal Entry
- Adjusting Entry
- Closing Entry
- Record (During the period) Record
- Trial (At the end of the period) Trial
- Unadjusted trial balance
- Post adjusting entries Post Adjust
- Adjusted trial balance
- Post
- Create finanical statements Financial Statements
- Post closing entries Closing Entries
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During the period, the cycle records all your transactions accordingly by the Cash Basis of Accounting. At the end of a period, we test for errors and respect our transactions by the Accural Method of Accounting. Finally, we create finanical statements that will be published, so that stakeholders can make decisions based on the financial information.
Accounting principles
Accounting principles are to make sure that companies' statements are true and fair.
Most accounting rules, like the Generally Accepted Accounting Principles (GAAP), are based on the accrual basis of accounting.
This mean that revenue is recognized when it is earned, and expenses are recognized when they are incurred, regardless of when cash is received or paid.
This is a method of accounting where revenue is recognized when cash is received and expenses are recognized when cash is paid.
The following gives a list of other principles:
| Principle | Description |
|---|---|
| Comparability | Financial statements must be comparable period to period |
| Conservatism | Considers all risks |
| Consistency | Same accounting methods year to year |
| Constraints | Information has a cost/benefit and is material |
| Cost principle | Keep costs at purchase price or lower (lower of cost or market) |
| Economic entity | Maintain separate records for each entity |
| Full disclosure | Provides detailed information in addition to financial statements |
| Going concern | Assume business is going to and has capability to continue |
| Matching | Recognize cost the same time as benefit |
| Materiality | Significance to the overall financial picture |
| Monetary unit | Currency is used to record transactions and is assumed to be constant |
| Relevance | Financial reporting has predictive, feedback, and timeliness value |
| Reliability | Financial reporting is neutral, valid, and verifiable |
| Revenue recognition | Conditions of how an organization records revenue |
| Time period | Report financial activity in specific time periods |