Financial Accounting is a crucial aspect of business that involves the systematic recording and communication of financial transactions. Governed by principles like GAAP and IFRS, it provides uniformity and comparability in financial reporting. Key principles include the Historical Cost, Revenue Recognition, Matching, Full Disclosure, and Objectivity Principles. Different from Managerial Accounting, it aids stakeholders in evaluating a company's financial health and making strategic decisions. Tools like Double-Entry Bookkeeping and Accrual Accounting are vital for accurate financial statements.
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Financial Accounting systematically records, summarizes, and communicates an organization's financial transactions
GAAP and IFRS
Financial Accounting follows standardized principles such as GAAP in the US or IFRS globally to ensure uniformity and comparability of financial information
Financial Accounting provides essential financial information for stakeholders to evaluate a company's financial status and make informed decisions
Assets and liabilities are recorded at their original purchase cost, providing a consistent valuation method
Revenue is recorded when it is earned, regardless of when payment is received
Expenses are matched with revenues in the period they help to generate
All information that could impact users' understanding of financial statements must be reported
Financial information is based on solid evidence
Financial Accounting is externally oriented, while Managerial Accounting is internally focused
Financial Accounting follows formal standards, while Managerial Accounting prioritizes internal utility
Both disciplines use the same financial transaction data but process and present it differently to meet their respective objectives
Double-Entry Bookkeeping provides a comprehensive record of financial transactions by impacting at least two ledger accounts
Accrual Accounting recognizes revenue and expenses when they are incurred, offering a more accurate picture of financial performance
Depreciation methods spread the cost of tangible assets over their useful lives, reflecting their consumption
Inventory management techniques, such as FIFO and LIFO, track the flow of inventory costs to match the physical flow of goods
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Standardized Accounting Principles
Rules ensuring uniformity in financial reporting; GAAP in US, IFRS globally.
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Financial Statements in Accounting
Documents summarizing transactions; include balance sheets, income statements, cash flows.
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Importance of Financial Statements for Stakeholders
Provide essential data for evaluating company's financial health, aiding decision-making.
