Financial accountancy (or financial accounting) is the field of accountancy
concerned with the preparation of financial statements for decision makers, such as
stockholders, suppliers, banks, employees, government agencies, owners, and other
stakeholders. The fundamental need for financial accounting is to reduce principal-
agent problem by measuring and monitoring agents' performance and reporting the
results to interested users.
Financial accountancy is used to prepare accounting information for people outside
the organization or not involved in the day to day running of the company.
Managerial accounting provides accounting information to help managers make
decisions to manage the business.
Financial accountancy is governed by both local and international accounting
1 Basic accounting concepts
o 1.1 FRS 5 & SSAP 2 & fundamental accounting concepts
2 Graphic definition
3 Meaning of the accounting equation
4 Related qualification
5 See also
Basic accounting concepts
Financial accountants produce financial statements based on Generally Accepted
Accounting Principles (GAAP) of a respective country.
Financial accounting serves following purposes:
producing general purpose financial statements
provision of information used by management of a business entity for decision
making, planning and performance evaluation
for meeting regulatory requirements
FRS 5 & SSAP 2 & fundamental accounting concepts
Understanding the fundamental accounting concepts
The accounting equation (Assets = Liabilities + Owners' Equity) and financial
statements are the main topics of financial accounting.
The trial balance which is usually prepared using the Double-entry accounting system
forms the basis for preparing the financial statements. All the figures in the trial
balance are rearranged to prepare a profit & loss statement and balance sheet. There
are certain accounting standards that determine the format for these accounts (SSAP,
FRS, IFS). The financial statements will display the income and expenditure for the
company and a summary of the assets, liabilities, and shareholders or owners’ equity
of the company on the date the accounts were prepared to.
Assets, Expenses, and Withdrawals have normal debit balances (when you debit these
types of accounts you add to them)...remember the word AWED which represents the
first letter of each type of account.
Liabilities, Revenues, and Capital have normal credit balances (when you credit these
you add to them).
0 = Dr Assets Cr Owners' Equity
. / Cr Retained Earnings (profit) Cr Common
Stock \ .
Cr Revenue . .
increased by debits increased by credits
Crediting a credit
Thus -------------------------> account increases its absolute value
Debiting a debit
Debiting a credit
Thus -------------------------> account decreases its absolute value
Crediting a debit
When you do the same thing to an account as its normal balance it increases; when
you do the opposite, it will decrease. Much like signs in math: two positive numbers
are added and two negative numbers are also added. It is only when you have one
positive and one negative (opposites) that you will subtract.
Meaning of the accounting equation
The value of a company can be understood simply as the useful assets that ownership
of a company entitles one to claim. This value is known as Owners' Equity. Some
assets of a company, however, cannot be claimed as equity by the owners of a
company because other people have legal claim to them - for example if the company
has borrowed money from the bank. The value of a resource claimable by a non-
owner is called a liability. All of the Assets of a company can be claimed by someone,
whether owner or not, so the sum of a company's equity and its liabilities must equal
the value of its Assets. Thus the accounting equation describes what portion of a
company's assets can be claimed by the owners.
Various account types are classified as 'credit' or 'debit' depending on the role they
play in the accounting equation.
Assets = Liabilities + Equity or Assets - Liabilities - Equity = 0
Another way of stating it is:
Equity = Assets - Liabilities
which can be interpreted as: "Equity is what is left if all assets have been sold and all
liabilities have been paid".
There are several related professional qualifications in the field of financial
o Qualified Accountant qualifications (Chartered Certified
Accountant (ACCA), Chartered Accountant (CA) and Certified
Public Accountant (CPA))
o CCA Chartered Cost Accountant (cost control) designation offered by
the American Academy of Financial Management
Cost and management accountant
Management accounting (the other main division of accounting)
Forensic Accounting is the specialty practice area of accounting that describes
engagements that result from actual or anticipated disputes or litigation. "Forensic"
means "suitable for use in a court of law", and it is to that standard and potential
outcome that Forensic Accountants generally have to work. Forensic Accountants,
also referred to as Forensic Auditors or Investigative Auditors, often have to give
expert evidence at the eventual trial. All of the larger accounting firms, as well as
many medium-sized and boutique firms, have specialist Forensic Accounting
departments. Within these groups, there may be further sub-specializations: some
Forensic Accountants may, for example, just specialize in insurance claims, personal
injury claims, fraud, construction, or royalty audits.
2 Forensic Accountants
3 Licensure Requirements
Engagements relating to civil disputes may fall into several categories: calculating
and quantifying losses and economic damages, whether suffered through tort or
breach of contract; disagreements relating to company acquisitions—perhaps earn
outs or breaches of warranties; and business valuation. Forensic Accountants often
assist in professional negligence claims where they are assessing and commenting on
the work of other professionals.
Engagements relating to criminal matters typically arise in the aftermath of fraud.
They frequently involve the assessment of accounting systems and accounts
presentation—in essence assessing if the numbers reflect reality.
Forensic Accountants may be involved in recovering proceeds of crime and in relation
to confiscation proceedings concerning actual or assumed proceeds of crime or money
laundering. In the United Kingdom, relevant legislation is contained in the Proceeds
of Crime Act 2002. In India there is a separate breed of forensic accountants called
Certified Forensic Accounting Professionals.
Some Forensic Accountants are also Certified Fraud Examiners and/or Certified
Forensic Accountants utilize an understanding of business information and financial
reporting systems, accounting and auditing standards and procedures, evidence
gathering and investigative techniques, and litigation processes and procedures to
perform their work. Forensic Accountants are also increasingly playing more
proactive risk reduction roles by designing and performing extended procedures as
part of the statutory audit, acting as advisers to audit committees, fraud deterrence
engagements, and assisting in investment analyst research.
As Forensic Accounting occasionally falls within the scope of Private Investigation,
some states require specialized certifications and licenses to work within the field. But
in most cases, accountants can perform Forensic audits without a private investigator
Historical financial statement
Financial statements (or financial reports) are formal records of a business'
In British English, including United Kingdom company law, financial statements are
often referred to as accounts, although the term financial statements is also used,
particularly by accountants.
Financial statements provide an overview of a business' financial condition in both
short and long term. There are four basic financial statements:
1. Balance sheet: also referred to as statement of financial position or condition,
reports on a company's assets, liabilities and net equity as of a given point in
2. Income statement: also referred to as Profit and Loss statement (or a "P&L"),
reports on a company's results of operations over a period of time.
3. Statement of retained earnings: explains the changes in a company's
retained earnings over the reporting period.
4. Statement of cash flows: reports on a company's cash flow activities,
particularly its operating, investing and financing activities.
For large corporations, these statements are often complex and may include an
extensive set of notes to the financial statements and management discussion and
analysis. The notes typically describe each item on the balance sheet, income
statement and cash flow statement in further detail. Notes to financial statements are
considered an integral part of the financial statements.
1 Purpose of financial statements
2 Government financial statements
3 Audit and legal implications
4 Standards and regulations
5 Inclusion in annual reports
Purpose of financial statements
"The objective of financial statements is to provide information about the financial
strength, performance and changes in financial position of an enterprise that is useful
to a wide range of users in making economic decisions." Financial statements
should be understandable, relevant, reliable and comparable. Reported assets,
liabilities and equity are directly related to an organization's financial position.
Reported income and expenses are directly related to an organization's financial
Financial statements are intended to be understandable by readers who have "a
reasonable knowledge of business and economic activities and accounting and who
are willing to study the information diligently."
Owners and managers require financial statements to make important business
decisions that affect its continued operations. Financial analysis are then
performed on these statements to provide management with a more detailed
understanding of the figures. These statements are also used as part of
management's report to its stockholders, as it form part of its Annual Report.
Employees also need these reports in making collective bargaining agreements
(CBA) with the management, in the case of labor unions or for individuals in
discussing their compensation, promotion and rankings.
2. External Users: are potential investors, banks, government agencies and other
parties who are outside the business but need financial information about the business
for a diverse number of reasons.
Prospective investors make use of financial statements to assess the viability
of investing in a business. Financial analyses are often used by investors and is
prepared by professionals (financial analysts), thus providing them with the
basis in making investment decisions.
Financial institutions (banks and other lending companies) use them to decide
whether to grant a company with fresh working capital or extend debt
securities (such as a long-term bank loan or debentures) to finance expansion
and other significant expenditures.
Government entities (tax authorities) need financial statements to ascertain the
propriety and accuracy of taxes and other duties declared and paid by a
Media and the general public are also interested in financial statements for a
variety of reasons.
Government financial statements
See also: Fund accounting
The rules for the recording, measurement and presentation of government financial
statements may be different from those required for business and even for non-profit
organizations. They may use either of two accounting methods: accrual accounting, or
cash accounting, or a combination of the two. A complete set of chart of accounts is
also used that is substantially different from the chart of a profit-oriented business
Audit and legal implications
Although the legal statutes may differ from country to country, an audit of financial
statements are usually, but not exclusively required for investment, financing, and tax
purposes. These are usually performed by independent accountants or auditing firms.
Results of the audit are summarized in an audit report that either provide an
unqualified opinion on the financial statements or qualifications as to its fairness and
accuracy. The audit opinion on the financial statements is usually included in the
There has been much legal debate over who an auditor is liable to. Since audit reports
tend to be addressed to the current shareholders, it is commonly thought that they owe
a legal duty of care to them. But this may not be the case as determined by common
law precedent. In Canada, auditors are liable only to investors using a prospectus to
buy shares in the primary market. In the United Kingdom, they have been held liable
to potential investors when the auditor was aware of the potential investor and how
they would use the information in the financial statements. Nowadays auditors tend to
include in their report liability restricting language, discouraging anyone other than
the addressees of their report from relying on it. Liability is an important issue: in the
UK, for example, auditors have unlimited liability.
In the United States, especially in the post-Enron era there has been substantial
concern about the accuracy of financial statements. Corporate officers (the chief
executive officer (CEO) and chief financial officer (CFO)) are personally liable for
attesting that financial statements "do not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with
respect to the period covered by th[e] report". Making or certifying misleading
financial statements exposes the people involved to substantial civil and criminal
liability. For example Bernie Ebbers (former CEO of WorldCom) was sentenced to 25
years in federal prison for allowing WorldCom's revenues to be overstated by $11
billion over five years.
Standards and regulations
Different countries have developed their own accounting principles over time, making
international comparisons of companies difficult. To ensure uniformity and
comparability between financial statements prepared by different companies, a set of
guidelines and rules are used. Commonly referred to as Generally Accepted
Accounting Principles (GAAP), these set of guidelines provide the basis in the
preparation of financial statements.
Recently there has been a push towards standardizing accounting rules made by the
International Accounting Standards Board ("IASB"). IASB develops International
Financial Reporting Standards that have been adopted by Australia, Canada and the
European Union (for publicly quoted companies only), are under consideration in
South Africa and other countries. The United States Federal Accounting Standards
Board has made a commitment to converge the U.S. GAAP and IFRS over time.
Inclusion in annual reports
To entice new investors, most public companies assemble their financial statements
on fine paper with pleasing graphics and photos in an annual report to shareholders,
attempting to capture the excitement and culture of the organization in a "marketing
brochure" of sorts. Usually the company's chief executive will write a letter to
shareholders, describing management's performance and the company's financial
In the United States, prior to the advent of the internet, the annual report is considered
the most effective way for corporations to communicate with individual shareholders.
Blue chip companies went to great expense to produce and mail out attractive annual
reports to every shareholder. The annual report was often prepared in the style of a
coffee table book.
1. ^ "Presentation of Financial Statements" Standard IAS 1, International Accounting
Standards Board. Accessed 24 June 2007.
2. ^ "The Framework for the Preparation and Presentation of Financial Statements"
International Accounting Standards Board. Accessed 24 June 2007.
3. ^ "The Framework for the Preparation and Presentation of Financial Statements"
International Accounting Standards Board. Accessed 24 June 2007.