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forensic accountant

Financial accountancy

Financial accountancy (or financial accounting) is the field of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, employees, government agencies, owners, and other stakeholders. The fundamental need for financial accounting is to reduce principal-agent problem by measuring and monitoring agents' performance and reporting the results to interested users.

Financial accountancy is used to prepare accounting information for people outside the organization or not involved in the day to day running of the company. Managerial accounting provides accounting information to help managers make decisions to manage the business.

In short, Financial Accounting is the process of summarizing financial data taken from an organization's accounting records and publishing in the form of annual (or more frequent) reports for the benefit of people outside the organization.

Financial accountancy is governed by both local and international accounting standards.

Basic accounting concepts

Financial accountants produce financial statements based on Generally Accepted Accounting Principles (GAAP) of a respective country.

Financial accounting serves following purposes:

  • producing general purpose financial statements
  • provision of information used by management of a business entity for decision making, planning and performance evaluation
  • for meeting regulatory requirements

FRS 5 & SSAP 2 & fundamental accounting concepts

Graphic definition

The accounting equation (Assets = Liabilities + Owners' Equity) and financial statements are the main topics of financial accounting.

The trial balance which is usually prepared using the Double-entry accounting system forms the basis for preparing the financial statements. All the figures in the trial balance are rearranged to prepare a profit & loss statement and balance sheet. There are certain accounting standards that determine the format for these accounts (SSAP, FRS, IFS). The financial statements will display the income and expenditure for the company and a summary of the assets, liabilities, and shareholders or owners’ equity of the company on the date the accounts were prepared to.

Assets, Expenses, and Withdrawals have normal debit balances (when you debit these types of accounts you add to them)...remember the word AWED which represents the first letter of each type of account.

Liabilities, Revenues, and Capital have normal credit balances (when you credit these you add to them).

or

0 = Dr Assets                            Cr Owners' Equity                 Cr Liabilities
          .       _____________________________/____________________________       .
          .      /    Cr Retained Earnings (profit)         Cr Common Stock        .
          .    _________________/_______________________________                      Cr Revenue                           .            .
      ________________________/  ______________________________________________________/
       increased by debits           increased by credits
          Crediting a credit
Thus -------------------------> account increases its absolute value (balance)
           Debiting a debit
          Debiting a credit
Thus -------------------------> account decreases its absolute value (balance)
          Crediting a debit

When you do the same thing to an account as its normal balance it increases; when you do the opposite, it will decrease. Much like signs in math: two positive numbers are added and two negative numbers are also added. It is only when you have one positive and one negative (opposites) that you will subtract.

Meaning of the accounting equation

The value of a company can be understood simply as the useful assets that ownership of a company entitles one to claim. This value is known as Owners' Equity. Some assets of a company, however, cannot be claimed as equity by the owners of a company because other people have legal claim to them - for example if the company has borrowed money from the bank. The value of a resource claimable by a non-owner is called a liability. All of the Assets of a company can be claimed by someone, whether owner or not, so the sum of a company's equity and its liabilities must equal the value of its Assets. Thus the accounting equation describes what portion of a company's assets can be claimed by the owners.

Various account types are classified as 'credit' or 'debit' depending on the role they play in the accounting equation.

Assets = Liabilities + Equity or Assets - Liabilities - Equity = 0 Another way of stating it is: Equity = Assets - Liabilities which can be interpreted as: "Equity is what is left if all assets have been sold and all liabilities have been paid".

Related qualification

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