Definition of Financial Accounting According to Experts, Functions, & Types

Definition of Financial Accounting Financial accounting has an important role that is needed in every company. Financial accounting can assist in the decision-making process related to the company’s economy and finances. In relation to management tasks, accounting plays a particular role in the supervisory and planning functions.

Finance is the heart of the company so every transaction that occurs must be clear and transparent. This will make it easier for the company to know the exact amount of turnover. That is why financial accounting is very necessary for the continuity of the company.

So that you understand it better, here is a little discussion about financial accounting and some things related to it.

Definition of Financial Accounting

Financial accounting is part of accounting which is related to the preparation of reports for outside parties such as shareholders. Financial accounting is closely related to the problem of recording company transactions and preparing periodic reports from the recording results. The main principle used is the accounting equation equals assets with liabilities plus equity.

Currently accounting is an important reason for many to study it, especially for entrepreneurs. Surely this will be very profitable for their business. In addition, many students, especially college students, are taking this major because job opportunities in this field are wide open and have a promising future.

Definition of Financial Accounting According to Experts

  • Kieso & Weygant (2000)

Financial accounting is the process of preparing the company’s overall financial statements to be used by users of financial statements from internal and external parties of the company.

  • Warren Reeve Fees (2008)

Financial accounting is the process of recording and reporting data as well as the company’s economic activities. The report will produce the main reports for owners, creditors, government agencies and the general public although the report information is very useful for managers.

Main Functions of Financial Accounting

Financial accounting has the main function of providing information related to the financial condition of a company. The company’s financial condition can be seen through the financial reports that are prepared so that it will bring up every change in every transaction that occurs within the company.

Thus the financial information of a company will be very useful as a management decision making that can affect the company’s future condition.

Some General Accounting Functions

Here are some general accounting functions that you need to know:

  • Provide a series of useful information for the company.
  • Know and calculate the amount of profit and loss earned by the company.
  • Help determine the rights of each party, both internal and external parties with an interest in the company.
  • Supervise and control all activities related to the company.
  • Help achieve company targets as determined.

Types of Financial Statements

In a company, financial reports are important information about the financial condition that is used to see the company’s performance in a certain period. Compiling financial reports will provide actual data that will facilitate the development of a company.

To facilitate company activities, companies generally integrate financial accounting with management accounting which can provide more comprehensive results.

The following are types of financial statements that can be studied and applied to companies.

1. Profit and Loss Report

The income statement is part of a company’s financial statements within a certain accounting period. This report will describe the elements of the company’s income and expenses which will generate profits and losses.

In addition, the income statement aims to determine the amount of profits and losses generated by a company. The income statement is also used to calculate the estimated tax that must be paid by the company.

As well as being used as an evaluation reference for company management and providing information about the appropriate steps that need to be taken if the burden incurred by the company is greater.

The income statement consists of two forms, namely:

  • SingleStep

In the single step form, implementing flow and grouping accounts is easier to do. This is because in the income statement the placement of income and profits is at the beginning of the report. Then proceed with expenses and expenses borne by the company. Furthermore, what determines the profit or loss of the company lies in the difference between total revenue and total expenses.

  • Multiple Steps

Meanwhile, in the multi-step income statement, operational and non-operational transactions must be separated while at the same time making comparisons of costs and expenses with related income. The report form also shows the difference between ordinary activities and incidental activities in operating profit.

2. Balance sheet

This type of balance sheet consists of a systematic list of assets ( assets ), debt ( liabilities ) and capital ( equity ) in a certain period of time. The balance sheet usually consists of two forms, namely the control/horizontal form (account form ) and the staff/vertical form ( report form ).

In general, the balance sheet financial statements aim to show conditions, positions and financial information during a certain period. These financial statements will describe the company’s financial position within a certain period of time. At the end of this report will show the position of assets, debt and capital that creates a balance or balance.

By knowing what are the types of financial reports, it will make it easier for companies to take appropriate steps in financial reports. The following are the three main elements in the balance sheet report:

  • Assets

Assets are property owned by the company and are usually used in the company’s operations. Assets will provide value to the company’s benefits in the future. Examples of assets are buildings used in company operations.

  • Liability

Liabilities are debts that must be repaid during a certain period. This debt consists of Current Liabilities and Long Term Liabilities . Liabilities are also referred to as the opposite of assets. If assets are property ownership while liabilities are obligations.

  • Equity

Equity or capital are assets owned by the company. Equity is also ownership of the company’s asset rights where the net worth is derived from total assets minus liabilities. All three can be connected through the equation Assets equal Liabilities plus Equity.

Learn more about conceptual financial reporting, company assets, liabilities, equity, and much more in Financial Accounting, Theory and Concepts by Tmbooks.

3. Report on Changes in Capital

Reports of changes in capital are financial reports prepared to show changes in the increase and decrease in assets within a certain period of time. This change can occur because the capital used continues to experience turnover, as well as the addition of profits and the use of capital for the benefit of the company.

The elements of the report on changes in capital are:

  1. Initial capital
  2. Profit and loss
  3. private
  4. Additional capital

4. Statement of Cash Flows

Statement of cash flow or also called cash flow which serves to determine the turnover of a company’s cash flow. This aims to provide information as well as to control the company’s funds or cash going and cash coming in during a certain period.

Statements of cash inflows can be seen from the results of operational activities and cash obtained from funding or loans. Meanwhile, cash outflow can be seen from the amount of costs incurred for certain operational and investment activities.

Based on the explanation above, we can conclude that financial reports can be useful and affect a company’s financial performance.

Stages in Learning Financial Accounting

  •  Identifying Transactions
    Identifying recordable and non-recordable transactions. Transactions that can be recorded have evidence such as receipts, notes, invoices proof of cash out, and so on.
  •  Analyzing Transactions
    Analysis of transactions aims to determine the effect on the financial position. Usually use the equation assets = liabilities + equity.
  •  Recording Transactions in Journals Journals
    are records that contain chronological transactions in an accounting period. This process is called journaling which consists of general and special journals.
  •  Transferring Journal to Ledger
    Transactions that have been recorded in the journal then move the records to the ledger. The general ledger is a set of bookkeeping accounts that are used to record asset information.
  •  Preparing a trial balance
    A trial balance is carried out to ensure that the amount of debit transactions and credit transactions must be the same. If the amount between the two is not the same, it can be said that the trial balance is not balanced.
  •  Making Adjusting Journal
    Making adjusting journal serves to achieve a balance in the financial statements. If there are several transactions that have not been entered or an error occurs when calculating an imbalance will occur.
  •  Creating a Post-Adjusted Trial Balance
    A trial balance that has been adjusted in the general ledger into a new trial balance. This process must show that balances in the assets and liabilities groups must be balanced.
  •  Preparing Financial Statements
    After the balance reaches a balance, the next step is to prepare financial reports. Financial reports can be structured as follows:
  1. Income statement
  2. Statement of changes in capital
  3. Balance report
  4. Cash flow statement
  •  Compile Closing Journals
    Closing journals are only prepared at the end of the accounting period. Accumulated revenues and expenses are reported at the end of the period. This is so that the income and expense accounts are not mixed up in the next period.
  •  Making readjustments.
    By making readjustments, the aim is to ensure that all income and expense accounts have been closed and to ensure that the balance sheet is in balance to continue opening the new book period.

Introduction to Basic Accounting

A Brief History of Accounting 

Accounting was born through the figure Luca Patiolo who was later dubbed the father of accounting in 1494. Then accounting was further clarified through a book that discussed recording and bookkeeping known as the double entry system, debit-credit in a book entitled Summa De Aritmatica, Geometrica, Proporpioni et Proportionalita .

The development of accounting was more rapid in European countries so that it became known as the Conventional Bookkeeping, which was inspired by a book by Luca Paliolo. Initially there was only one bookkeeping, namely a single bookkeeping. However, due to the emergence of complex needs, pair bookkeeping emerged.

Basic Accounting Equations

The basic accounting equation is the relationship between assets, capital and debt of a company. This basic accounting equation is intended as the basis for recording the accounting system.

What is meant is that every transaction process occurs, it must be recorded in accordance with two aspects, namely assets and liabilities.

Therefore, the meaning of the basic accounting equation is the balance between the assets and liabilities that must always be maintained as a result of changes in financial transactions. The general form of the basic accounting equation is:

Assets = Debt + Capital

Debt = Assets – Capital

Capital = Assets – Debt

Assets + Expenses = Debt + Debt + Income

Intermediate financial Accounting

Intermediate financial accounting is a continuation of introductory basic accounting. Intermediate accounting will study cash/cash equivalents, bank reconciliation, short-term investments, receivables, inventories, tangible and intangible fixed assets, long-term investments, short-term debt and equity accounting and retained earnings.

Advanced Financial Accounting

Advanced financial accounting is accounting that discusses the preparation of consolidated financial statements, as an implication of ownership and control of the company’s investment.

In advanced financial accounting, it provides more understanding regarding the concept of business combinations, the accounting treatment of investments in equity instruments, making elimination journals and preparing consolidated reports based on financial accounting standards.

Advanced Financial Accounting Book Example

For those of you who want to study more complete accounting material, you can read the IFRS Edition Advanced Accounting book. The detailed discussion is summarized in light and interesting language, so that it is easy for readers to understand. It is suitable for students and prospective novice accountants so they can quickly master and apply SAK in Indonesia.

There are also several other introductory accounting books:

Financial Accounting And Institutions

Financial and institutional accounting is a skill competency or department that is related to numbers and calculations. Accounting skills competency will study manual accounting and computer accounting in spreadsheets. Accounting and institutions will create an accountant who will process financial records and financial reports in a company.

Regional Financial Accounting

Regional financial accounting is an accounting process that occurs in a local government agency such as a district, city or province which includes the process of identifying, measuring, recording and reporting which aims to make economic policies by internal and external parties.

Regional Financial Accounting Output

In carrying out the identification process, the measurement of economic transactions must be expressed in rupiah currency. Recording transactions and data processing certainly requires a variety of important information.

This information will later be used as a reference for preparing local government financial reports. The outputs used in local government financial reports include Budget Realization Reports, Balance Sheet Reports, Cash Flow Reports, and Financial Records and Reports.

Regional Financial Accounting Cycle

The regional financial accounting cycle is almost the same as the accounting cycle in general. The only difference is in the plot.

The flow in regional financial accounting after the preparation of the Trial Balance After Adjustment can immediately be made APBD Calculation Reports. After that, a Journal Closing will be carried out and a Cash Flow Report, a Local Government Capital Profit Loss Report, and a Balance Sheet will be made immediately.

Financial Accounting Standardization

The preparation of financial reports on accounting should use the applicable basic accounting principles or in accordance with the Statement of Financial Accounting Standards (PSAK).

The regulation contains standards for recording, preparing and presenting financial reports with reference to the in-depth theory of the Indonesian Institute of Accountants (IAI).

PSAK has been applied in Indonesia since 1994. In the development of the preparation of Indonesian accounting standards, it cooperates with the development of the preparation of international accounting standards by the International Accounting Standards Board (IASB).

For you to better understand the concepts and application of PSAK needed to apply financial accounting to the world of practice, you can use the Financial Accounting book below as a reference.

The IASB then issued international financial accounting standards in the conversion process with the International Finance Reporting Standards (IFRS).

Thus a little discussion of financial accounting and several other things related to it. Hopefully useful for all readers.