Financial Accounting is often called the language of business; it is the language that managers use to communicate the firm’s financial and economic information to external parties such as shareholders and creditors. Nobody working in business can afford financial illiteracy. Whether you run your own business, work as a manager, or are just starting your career, you want to understand financial information and be able to interact with accountants, controllers, and financial managers. You want to talk business or be able to read and interpret financial statements for business diagnosis and decision-making. It is an enabler for all non-financial personnel to understand the position of any organization at every point in time. Accounting organizes and summarizes economic information so that decision-makers can use it. The information is presented in reports called financial statements. To prepare these statements, accountants analyse, record, quantify, accumulate, summarize, classify, report, and interpret economic events and their financial effects on the organization. The series of steps involved in initially recording information and converting it into financial statements is called the accounting system. Accountants analyse the information managers and other decision makers need and create the accounting system that best meets those needs. The real value of any accounting system lies in the information it provides.
When financial statements are well examined, the evaluators can easily identity the healthiness of the business, Parties involved can assess their success/failure, financial solvency/insolvency, and other factors using these accounts, statements, and reports. Accounting does not only involve the upkeep of accounting records but also the preparation of financial and economic reports. It is important to quickly mention the 5 key financial statements and their information content Statement of Financial position
A statement of financial position provides an overview of a company’s assets, liabilities, and shareholders’ equity as a snapshot in time. The date at the top of the Statement of financial position tells you when the snapshot was taken, which is generally the end of the reporting period. The content of this statement includes:
Assets are things that a company owns that have value. This typically means they can either be sold or used by the company to make products or provide services that can be sold.
Liabilities are amounts of money that a company owes to others. This can include all kinds of obligations, like money borrowed from a bank to launch a new product, rent for use of a building, money owed to suppliers for materials, payroll a company owes to its employees, environmental clean-up costs, or taxes owed to the government. Liabilities also include obligations to provide goods or services to customers in the future.
Shareholders’ equity is sometimes called capital or net worth. It’s the money that would be left if a company sold all its assets and paid off all its liabilities. This leftover money belongs to the shareholders, or the owners, of the company.
The following formula summarizes what a Statement of Financial position shows:
ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY
A company’s assets have to equal, or “balance,” the sum of its liabilities and shareholders’ equity.
Liabilities are generally listed based on their due dates. Liabilities are said to be either current or long-term. Current liabilities are obligations a company expects to pay off within the year. Long-term liabilities are obligations due more than one year away.
Shareholders’ equity is the amount owners invested in the company’s stock plus or minus the company’s earnings or losses since inception. Sometimes companies distribute earnings, instead of retaining them. These distributions are called dividends.
An income statement is a report that shows how much revenue a company earned over a specific period (usually for a year or some portion of a year). An income statement also shows the costs and expenses associated with earning that revenue. The literal “bottom line” of the statement usually shows the company’s net earnings or losses. This tells you how much the company earned or lost over the period.
Cash Flow Statements
Cash flow statements report a company’s inflows and outflows of cash. This is important because a company needs to have enough cash on hand to pay its expenses and purchase assets. While an statement can tell you whether a company made a profit, a cash flow statement can tell you whether the company generated cash.
Statement of Changes in Shareholder Equity
The statement of changes in equity tracks total equity over time. This information ties back to a balance sheet for the same period; the ending balance on the change of equity statement is equal to the total equity reported on the balance sheet.
Notes to financial statement
These provide additional information pertaining to a company’s operations and financial position and are an integral part of the financial statements. The notes are required by the full disclosure principle.
Truly accounting is the language of business, it speaks to the need of all categories of users depending on their area of concern.