What is Financial Accounting?

Financial Accounting means identifying, recording, classifying, summarising, analysing, interpreting, and communicate the financial information, to shareholders and other interested users, of all business transaction are the important stages in the accounting cycle.

Accounting cycle in financial accounting 
The following are the steps are used in financial accounting for business transactions and preparing the financial accounts.

• Identifying and Recording is the first step which is usually accomplished through journal entry or subsidiary account books i.e., first step is the recording of transactions in the books of accounts. The origin of a transaction is derived from the source document.  
• The second stages is classifying, it is achieved through ledger. i.e., A Ledger is a book which contains all the accounts whether personal, real or nominal, which are first entered in journal or special purpose subsidiary books. 
• Summarizing is accomplished by preparation of trial balance. The next step in the accounting process is to prepare a statement to check the arithmetical accuracy of the transactions recorded so for. This statement is called Trial Balance. Trial balance proves the arithmetical accuracy of the business transactions, but it is not the end. The businessman is interested in knowing whether the business has resulted in profit or loss and what the financial position of the business is at a given period. To know the profitability and the financial soundness of the business. The trader can ascertain these by preparing the final accounts. The final accounts are prepared at the end of the year from the trial balance. Hence the trial balance is said to be the connecting link between the ledger accounts and the final accounts.  
• Finalizing is through preparation of trading account, profit and loss account and balance sheet of the business entity. In financial accounting the final accounts of business concern generally include two parts. The first part is Trading and Profit and Loss Account. This is prepared to find out the net result of the business. The second part is Balance Sheet which is prepared to know the financial position of the business. However manufacturing concerns, will prepare a Manufacturing Account prior to the preparation of trading account, to find out cost of production. This is the last stage for completing the final accounts and communicates to business persons.

It is very essential to understand the objectives of each stage and the books and records maintained to achieve the objective.

Financial accounting - Recording the business transactions in a systematic manner is the first step in the accounting process. It is also important the each transaction has to be recorded as and when it occurs, in chronological order.

The financial transactions are recorded must be supported by reliable documentary evidence like sales invoice, receipts and other vouchers. These supporting documents are the written and authentic proof of the correctness of the recorded transactions.

Financial Accounting implies recording of business transactions is usually done in journal or subsidiary books. Journal entry system is used by the small business concerns and in case of big size business firms use subsidiary books system to complete the process.

Financial accounting is used by all types of business entities and it gives financial statements, accounting cycle process.

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