Financial Accounting Principles Explained

Financial accounting is the area of accounting generally concerned with the reporting, analysis and preparation of financial records that are accessible for public viewing. This includes the preparation of financial reports for public viewing, that are prepared in connection with a business activity. In the United States, the term accounting refers to the principles, methods, principles, concepts and strategies used in the accounting of a non-financial entity for the benefit of another. In other words, accounting is concerned with the detection, measurement, reporting and interpretation of events and transactions related to persons, items and transactions involving financial instruments and money.

The word accounting pertains to the different branches of the natural sciences and engineering. In simple terms, accounting involves the measurement of data to provide information about the changes that have occurred as a result of the passage of time. Accounting records show the quantities, values, and dates associated with an account. In the process of recording financial transactions, certain procedures are involved that require a formal training and education like that of accountants. To be an accountant, one should pass the accounting exam administered by the American Institute of Certified Accountants (AICCA). In order to become certified as an accountant, one must undergo a minimum of 200 hours of classroom study, through a combination of on-the-job training and on-the-job experience.

There are four principles on which financial accounting is based. One would be income statement principles, which indicate how the revenue earned from the business can be used to assess current and long-term financial performance. Another principle is the profit and loss principle, which consider the gross profit, sales price less cost of goods sold, and net profit after expenses have been taken into consideration. An accounting principle is also followed when calculating taxes.

The principles of management are also reflected in the accounting standards. Management financial statements, which present the results of operations for a specific period of time, are considered to be the main data used in assessing managerial accounting practices. Key managerial accounting principles are cost accounting, the material accounting system, process accounting, information systems and production accounting. Management financial statements also cover other related fields such as risk management, regulatory accounting, intercompany reporting, compensation and performance oversight. There are also principles of audit and fair presentation of financial documents.

Auditing is an important aspect of financial accounting. It involves examination of an accounting transaction by someone or a group having the capacity to provide reliable judgments about the nature of that transaction. Auditors are also called in to review accounting reports produced by management, to identify accounting errors, inconsistencies, and make recommendations on how to improve the quality of financial reporting. They report their findings to the concerned managers, who are usually required to respond to them.

The balance sheet, which gives the details of assets, liabilities and assets held by the company at a particular point of time, is considered the most basic part of financial accounting. All other financial accounting methods depend on the balance sheet. A company’s balance sheet can be prepared in different ways. Two of the widely used methods are: the statement of earnings and the statement of cash flows. The statement of earnings provides information on the income that the company made during a specific period of time; it also includes information on the assets and liabilities owned by the company, and the nature and level of control exercised by the management over those assets and liabilities.

A balance sheet must be prepared before the year end. Usually, financial statements are prepared for the first half of the year and presented during the annual financial meeting. In the second half of the year, financial statements are usually presented. The balance sheet should show all relevant information such as income statement, balance sheet, statement of cash flows and other related documentation. All these financial statements are used together with the financial reporting standards established by the US GAAP (Generally Accepted Accounting Principles).

General accounting principles, on the other hand, deal with the recording of transactions, determining the recording of information for the preparation and filing of financial statements, analyzing the results of the accounting process and the effect of events on the basis of facts and figures, and identifying events that have a material impact on the achievement of the objectives of the company. Generally, gifts are used to comply with the requirements of GAAP. An accounting principle is a general rule or regulation that specifies how an entity or organization should measure its financial worthiness. There are many IFRS principles that have been specified by the GAAP (Generally Accepted Accounting Principles), including the concept of fair value measurement.

Financial Accounting Principles Explained
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