Financial accounting is also known as external accounting.
Financial accounting is that which produces and delivers information about the economic state of a company to interested agents (investors, clients, etc.). This accounting, also known as external , is officially regulated.
It should be noted that the concept of accounting refers to a science or technique whose objective is to provide useful information for making economic decisions. Accounting, therefore, analyzes assets and their movements, reflecting the results in financial statements that summarize an economic situation.
Accounting can be understood as a science since it generates systematic, verifiable and fallible knowledge, while it is also a technique since its procedures allow data to be processed and applied.
The adjective financial , for its part, refers to what belongs to or relates to the public treasury, commercial businesses or stock market and banking issues.
Function of financial accounting
Financial accounting collects, records, classifies, summarizes and reports the operations that can be quantified in money and carried out by an economic entity. What accountants do, in short, is reflect the economic history of a company . Financial statements allow managers to make decisions and report data required by shareholders or state agencies.
Among the activities of those responsible for the financial accounting of a company, we can mention the systematic and chronological recording of operations and the delivery of reports on financial movements to the appropriate party.
This allows us to determine what is the asset and what is the liability of a company, knowing its profits or losses. Financial accounting is also necessary to carry out a correct settlement of taxes .
Financial accounting generates information about the economic status of a company.
General principles
The general principles of accounting are the following:
Entity
It is a unit that carries out economic activities and is made up of combinations of human, natural and capital resources, which are coordinated by an authority that focuses its decisions on achieving the objectives for which it was conceived. An entity can be a legal or natural person, or a combination of both and is not limited to the legal constitution of the parts that make it up.
Emphasis
Financial accounting emphasizes the economic level of events and transactions, even when the legal form differs and requires different treatment. Therefore, transactions and events must be considered, recorded and disclosed according to their financial meaning and reality, as opposed to a mere observation of their legal form.
Quantification
The data that is quantified represents an important aid for the communication of economic information and for rational decision making.
Unit of measurement
Money is a fundamental element for economic activity and, therefore, for financial accounting, since it allows measurement and analysis. Despite not being the only unit of measurement, money is the means that allows the most effective expression of material exchanges and services, as well as the economic effects that events have on the entity.
Economic duality
To correctly understand the structure of the entity and its connection with others, it is essential to present in an accounting manner the economic resources that it has at its disposal to achieve its objectives and their sources.
Business in progress
Financial accounting views the entity as a business that operates and will continue to do so in the future; In other words, it does not anticipate its eventual liquidation or substantial reduction in the scale of its operation.
Accounting realization
One of the tasks of financial accounting is to quantify the operations carried out by an entity with other members of economic activity, as well as the events that may affect it, and this is usually done in monetary terms. Some of the events and operations that are taken into account are economic transactions, internal transformations that alter the structure of sources or resources and any external event that may have monetary repercussions on the entity.