A transaction is recorded as a debit in one account and simultaneously recorded as a credit in the other account. In this article, you will learn the A to Z of financial accounting. You will learn the basics such as the meaning of financial financial accounting accounting, how it works, why it is important, and the two types of financial accounting. Although the press doesn’t use financial information for its decision bases, it does report on the financial information of companies.
So, the primary objective of financial statements is to assist the users in their decision-making. Through these fundamental accounting statements, the corporate management communicates financial information to all of its stakeholders. The underlying concept in accrual accounting emphasizes that the revenues of a business are recognized when they are earned. This concept of accounting states that expenses incurred in a particular accounting period should match with the revenues generated during the same period.
How Financial Accounting Works
Financial accounting aims as providing financial information that is reliable, relevant, and comparable to these external users. Unlike company management or internal users, external users of financial information are not directly involved in running the business or organization. They are outsiders to the business and only have limited information about companies’ operations, financial position, and well being.
For any transaction, the debit amount must be equal to the credit amount. The double-entry bookkeeping format is one of the most efficient ways of recording a company’s transactions. It helps you keep tabs on the company’s present financial health and rate of financial growth. It might sound unlikely, but many customers study financial statements before making major purchases. For instance, large companies like GM will study financial statements of their potential suppliers in order to make sure they are fiscally sound.