Financial Accounting

Financial accounting is a financial information system that tracks and records an organization's business transactions and aggregates them into reports for decision makers both inside and outside the business. A transaction is an event that has consequences for a business' financial condition. The event could be either external or internal to the business.

five basic financial accounting concepts: entity, money measurement, going concern, consistency and materiality.

A balance sheet, also called a statement of financial position, is a report of the organization's financial situation at a particular point in time. It lists the entity's assets, liabilities and owners' equity. It is called a balance sheet because it reports the balance or amount in each asset, liability and owners' equity account.

The statement of cash flows details the sources and uses of cash by the entity over an accounting period. For the convenience of financial statement users, the statement of cash flows is organized by type of business activity: operating, investing and financing.

The money measurement concept states that financial accounting deals only with things that can be represented in monetary terms. This concept is so intuitive that it is usually taken for granted. But, since it is so important, it is stated as a basic accounting concept.

Going concern is accounting's way of saying that an entity is expected to remain in operation for the indefinite future. The going concern concept directs the accountant to explicitly make this assumption in the absence of evidence to the contrary. The significance of the going concern concept can be understood by considering the alternative: that the entity is about to go out of business. If this was the case, all its resources should be valued at their current worth to potential buyers. The going concern concept directs the accountant, under the normal course of business, to ignore this doomsday scenario.

The consistency concept states that an entity should use the same accounting methods and procedures from period to period unless it has a sound reason to change methods.

The materiality concept states that an entity need only apply proper accounting to items that are material, i.e., significant to potential users of the financial statements. This concept allows the accountant to be practical in choosing the appropriate degree of precision in the accounts. The materiality concept states that an entity need only apply proper accounting to items that are material, i.e., significant to potential users of the financial statements. This concept allows the accountant to be practical in choosing the appropriate degree of precision in the accounts.

In financial accounting, the quality of the output depends on the relevance and reliability of the data presented.