Introduction to Financial Accounting: Book Keeping and Accounting

Overview

Accounting is very essential in the life of any organization. And while there are different fields of study in Accounting, Financial accounting stands out among all because of its place in determining the true health of an organization.

Financial accounting has to do with the money-related aspect of every business life. Hence, wherever there is a question of money, financial accounting comes up. Even organizations that are said to be not-for-profit-making organizations nonetheless deal with money, hence the need to practice accounting in their organizational processes. The two major stages of financial accounting are book-keeping and accounting.

Meaning of Bookkeeping and Accounting:

Bookkeeping Defined:

Bookkeeping is simply defined as the systematic recording of business transactions in such a way that the financial position of the given business can be determined at a specified period. Simply put, bookkeeping is the recording aspect of the broader stage, accounting. And this must follow a systemic standard, which is presented periodically.

Accounting Defined:

Accounting is the broader stage of financial accounting. It is the process of collecting, collating, recording, classifying, analyzing, interpreting and communicating the financial statement of an organization to enable managers and other users make informed decisions.

You can see from the definition that accounting begins way right the moment transactional contracts are entered into, even before recordings are made; and goes beyond that until the final statement is presented so that those who need it can make informed decisions.

Importance of Accounting and Bookkeeping

i.                     Needed for decision making;

ii.                   Provides permanent records for business transactions;

iii.                  Helps in the determination of the profitability of a business concern;

iv.                 Serves as checks against fraudulent practices;

v.                   Used for tax assessment;

vi.                 Facilitates reference making to past transactions;

vii.                Facilitates inter-firm comparison;

viii.              Shows the financial position of an organization at a given period.

Users of Accounting Information

The principal users of financial accounting report and what they need it for are as follows:

a.       Owners/Managers: They need the financial accounting information to ascertain the profitability of the business as to decide on whether to continue or discontinue the venture as well as the possible measures to take to remedy any negative trend.

b.      Employees: Employees need to be sure if they are riding on a steady or sinking ship so that they quickly take the right decision that guarantees the desired future.

c.       Competitors: Their interest in the financial reporting of a rival company is just to take advantage of any slip as well work towards meeting up in the midst of the competition.

d.      Government/Tax authorities: The tax authorities under the government would want to know the true position of the profit before tax (PBT) of a given organization, so that they can rightly charge the due tax for the government. This is why Public Limited Liability companies are obliged by law to publish their annual financial report.

e.      Creditors: Creditors would want to be sure they are dealing with a healthy company in terms of their level of financial liquidity; and not with one that is near to insolvency. And the only way to ascertain this is by studying their financial report.

f.        Banks: Banks like creditors would not guarantee a company any credit facility if they learn that the company is not meeting up with its financial obligation. And all they need to know this is to carefully go through the company’s financial statement.

g.       Financial analysts: Financial accounting reports help financial analysts observe trends, which enables them make future predictions, especially when advising their clients on investment portfolios.

h.      The general public: The general public like every other user of financial accounting reports want to be in the know about the financial state of the organization they are dealing, as nobody would want to be associated with a crumbling venture. Hence, they need the financial accounting report to make an informed decision.

Conclusion

Financial accounting reporting is essential for the health of any organization, including not-for-profit-making outfits. And every person, especially organizational managers need at least a basic knowledge of how bookkeeping and accounting works.

If you have ever handled money, you need financial accounting knowledge.