What is Financial Accounting? What are its Importance and Objectives for your Organization?

In today's reality of dealing with cloud accounting systems, we have observed that many entrepreneurs, investors, and even accountants no longer have a strong grasp of the fundamentals of financial accounting. For this reason, we at Joudet Al-Hesabat (Accounts Quality ) have adopted this article to enable professionals in the field to understand the basics of accounting, and to know: What is financial accounting? We focus on explaining its types and the importance of knowing them. Follow along with us in this article.

1. What is Financial Accounting?

Financial accounting is a discipline concerned with recording and classifying financial transactions, which include (purchases, production, sales, collection of receivables, settling debts, etc.). These transactions are recorded in the organization's journals and classified into assets and liabilities, to be presented in financial statements such as the Balance Sheet, Cash Flows, and others. Its goal is to reflect a true, accurate, and error-free picture of the organization's financial position to determine the result of the fiscal period, thereby allowing founders, lenders, and investors to make clear decisions.

2. Concept and Importance of Financial Accounting: 

Financial accounting is a branch of accounting dedicated to analyzing the financial transactions conducted by a company during a past fiscal period.

The fundamentals of financial accounting rely on the following:

• Creating Double-Entry Bookkeeping: This involves establishing debit balances and credit balances, which helps to track the effect of the accounting process on the company's accounts, whether by increase or decrease.

• The financial accountant provides financial data for making major financial decisions. Additionally, this information assists the company's management in determining if the current strategy is generating sufficient profit, or if it should be changed to another strategy that yields a greater profit than the current one.

• Financial statements provide accurate information about the company's financial status, helping investors decide whether or not to invest in the company.

• Identifying Financial Strengths and Weaknesses: It helps investor companies identify strengths and weaknesses within the company's financial structure.

• Financial accounting assists companies in determining the daily productivity of employees and the impact of external conditions on that productivity. Furthermore, it helps company owners determine the methods they will use to motivate employees and assess the impact of these methods on daily productivity.

• The financial statements prepared by financial accountants aid in the financial analysis of the company's position and its ability to sustain operations. They also help in determining the company's capacity for market competition.

3. What are the Types of Financial Accounting?

Assets are resources controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity.

The Four Main Types of Accounts:

1. Assets:

Current Assets (Short-Term)

These are assets owned by the entity in cash form or those expected to be converted into cash within the next fiscal period (usually one year), such as:

• Cash in the petty cash fund and bank.

• Inventory (Stock/Goods).

• Notes Receivable (Bills Receivable).

• Accounts Receivable.

  
  

Fixed Assets (Long-Term Assets)

These are assets owned by the entity for the purpose of aiding the entity in carrying out its operations and are intended to be used for several years or several subsequent fiscal periods. The goal of acquiring them is not their resale, such as:

• Land

• Buildings

• Machinery

• Equipment

• Furniture (Fixtures and Fittings)

  
  

Intangible Assets (Long-Term Assets)

These are assets owned by the entity that lack physical, tangible substance, such as: Trademarks &Copyrights.

Other Assets and Debit Balances

These are other accounts that inherently have a debit nature and appear on the Assets side of the Balance Sheet because they represent holdings (resources) of the company, such as:

• The Prepaid Expenses account (e.g., prepaid rent or insurance).

• The Accrued Revenues account (Revenues Earned but Not Yet Collected/Receivable).

2. Liabilities and Equity:

*Liabilities

These represent all the obligations and amounts owed by the entity.

They are divided as follows:

Short-Term Liabilities (Current Liabilities)

These are obligations that the entity must settle during the next fiscal period (less than one year), such as:

• Short-Term Loans

• Notes Payable

• Accrued Expenses

• Unearned Revenue

  
  

Long-Term Liabilities

These are obligations that the entity must settle during subsequent fiscal periods (more than one year).

Examples: Long-Term Loans (e.g., mortgage payable), Bonds Payable.

Other Liabilities and Credit Balances

These are other accounts that inherently have a credit nature and appear on the Liabilities side of the Balance Sheet because they represent an obligation on the company, such as:

• Accrued Expenses account (Expenses Incurred but Not Yet Paid).

• Unearned Revenue account (Revenues Received in Advance).

*Equity

These are the accounts that represent the entity's obligations toward the owners of the entity (the partners), such as:

• The Capital Account.

• The Personal Withdrawals Account.

• The Retained Earnings Account.

• Share Capital.

  
  

3. Revenues

These are the accounts that arise when goods are sold or a service is rendered to others.

Examples: Sales Revenue, Service Revenue, Rental Income, Interest Income.

4. Expenses

These are the accounts that arise when the entity obtains services from others that help it carry out its operations and achieve its objectives, such as:

• Electricity expenses

• Advertising and publicity.

• Salaries.

• Rent.

2. Objectives of Financial Accounting:

Here are the objectives of financial accounting that you should know:

• Calculating the net income or net loss generated by the business over a specific period.

• Identifying the assets (possessions), liabilities (obligations) of the company, and the changes occurring to them.

• Aiding internal planning of projects and operations within the company.

• Assisting them in making investment decisions, deciding whether to grant loans, and understanding the company's resources and cash liquidity.

5. What is the Difference Between Managerial Accounting and Financial Accounting?

• Managerial accounting is restricted to the internal reports of the company, whereas financial accounting is concerned with recording the financial transactions and events that occur throughout the period, which are then presented to shareholders and investors.

• Managerial accounting consists of reports through which external and internal disclosures are redistributed and then recorded through financial accounting.

• Example: The electricity bill was paid through financial accounting; it is then distributed among the benefited cost centers through managerial accounting. -

Since managerial accounting does not result in new cash flowing in or out, the company's performance in the annual report is derived from the accounting treatment according to International Financial Reporting Standards (IFRS).

6. Frequently Asked Questions (FAQs) About Financial Accounting: Its Importance and Objectives for Your Organization

1. What are the Functions of Financial Accounting?

The functions of financial accounting are to record, classify, and summarize the entity's financial data and prepare standardized financial statements  to primarily provide accurate and reliable reports to external users to assist them in making economic decisions.

2. What are the Duties of a Financial Accountant?

• Regularly recording daily financial transactions.

• Performing periodic adjustments (e.g., accruals and deferrals).

• Preparing the main financial statements (Income Statement and Statement of Financial Position) periodically, according to accounting standards.

• Assisting with auditing processes and legal compliance.

3. What is the Difference Between a General Accountant and a Financial Accountant?

• Financial Accountant is an accountant who works within a specific entity and focuses on preparing financial reports for external users.

• General Accountant often refers to a Certified Public Accountant (CPA) who works in an external firm (public practice) and provides various services to the public, including auditing and tax consulting.

7. How Does Accounts Quality Help You Achieve Accurate Financial Management?

At Accounts Quality, we handle all types of accounting without exception, applying all International Accounting Standards (IFRS) without disregarding any standard.

Therefore, Accounts Quality is considered one of the most important companies you can work with to manage your accounts, whatever the nature of your activity or your requirements, all within the most carefully studied prices.