Accounting Principles
Financial accounting is the area of accounting usually concerned with the reporting, analysis and preparation of financial transactions in relation to a company. This usually includes the preparation of financial reports for general viewing by the public. It also involves a lot of data collection and is prone to a great deal of errors. To minimize these risks financial accounting provides decision makers with a wide range of tools and techniques that help in making sound financial decisions.
The main objective of financial accounting is to provide decision makers with reliable information about the financial activities of a company. This facilitates an informed decision on the allocation of resources by the managers of the company. By providing timely and accurate financial information to stakeholders, financial accounting helps them in making decisions about resource allocation. Some of the key stakeholders in any organization are the suppliers, customers, tax authorities, management and regulators. All these need accurate accounting and reports at periodic intervals to provide accurate and useful financial information.
In order to prepare financial statements a company needs certain information regarding the assets, liabilities and revenues. The first two categories have easy to determine as they are all physical entities. They include inventory, accounts receivable and inventory. The next two categories which are financial liabilities and capital assets come into account differently as they contain complex concepts. There are many ways in which the financial statements can be prepared. Generally the process involves a balance sheet, an income statement and a cash flow statement.
Financial Accounting Principles
The financial accounting process can be complicated. It is therefore essential that a good understanding is achieved by the transaction managers. The financial accounting principles that are followed allow for the preparation of reliable financial reports. The process of following these principles requires a substantial amount of work and has a number of reporting requirements. The core principles of accounting are based on the principles of management of financial resources, consistency of financial records, accurate recording and reporting of financial information, provision for collectible claims, and protection of funds.
It is very important that the right people are involved in the entire process. This would include not only the accountant but also the other stakeholders like the bank, creditors and customers. The involvement of all the stakeholders provides a level of consistency and security to the financial accounting process. It is important to maintain consistency in the reporting requirements of the accounting principles in order to keep track of the changes in the financial records.
Net income statement can be prepared as per the following guidelines. First column gives the gross profit. Second column gives the net income or pretax income. The third column gives the net income statement and the fourth column gives the balance sheet results in the last column.
