WHAT IS FINANCIAL ACCOUNTING AND WHY IS IT IMPORTANT FOR AN ORGANIZATION?

Financial accounting is the process of recording, summarizing and reporting a company’s business transactions with the means of financial statements.  The various statements are made up with The Income Statement, The Balance Sheet, The statement of Retained Earnings and The Cash Flow statement.

How are they used?

All these listed statements are used in various ways in any business or organization.

• The Management team will use this to plan their respective business plans and the direction the business is going in, but also to keep a handle on cash flow and any potential issues in the business.
• Investors will review these documents to ascertain if they want to invest in the business and how much they would want to invest and will look at risk vs. profit, etc.
• Auditors use these for annual audits and to ensure the organization is compliant with Legislation and SARS.
• Should the company ever want to apply for bank loans the Bank will need to see these documents to ascertain risk and liability.
• Suppliers may at times want to see these financials before extending credit for services rendered or stock provided.

WHAT IS THE DIFFERENCE BETWEEN ACCOUNTING AND FINANCIAL ACCOUNTING?

The fundamental difference is Accounting incorporates all company financial transactions.  A good accounting team or department should always be well managed with policies, procedures and have SLA’s (service level agreements) in place.  So, Accounting departments as such, are responsible to monitor expenses, generate reports and manage data.

Financial Accounting on the other hand is concerned specifically with the generation of these reports and the accuracy thereof and is required by law. These statement are typically included in the company’s annual report.

 

How to study toward Financial Accounting? Click here to see how you can study and look here to see the full ICB Financial Accounting Programme.