Financial accounting can be best described as the recordation of information about money. This includes important information about issuing an invoice to someone, as well as the payment of that invoice.

Here is an overview of important information about financial accounting and some key terms that are important for you to understand.

Transactions

A “transaction” can be described as a business event that has a monetary impact, for example something such as; selling goods to a customer or buying supplies from a supplier. In financial accounting, a transaction triggers the recording of information about the money involved in the event. For example, we would record in the accounting records such events transactions as;

  • Incurring debt from a lender
  • The receipt of an expense report from an employee
  • The receipt of an invoice from a supplier
  • Selling goods to a customer
  • Remitting sales taxes to the government
  • Paying wages to employees
  • Remitting payroll taxes to the government

Accounts

An account is a separate and detailed record about a specific item, for example expenditures for office supplies, or accounts receivable, or accounts payable. There can be many accounts, of which the most common are:

  • Cash – This is the current balance of cash held by a business, usually in checking or savings accounts.
  • Accounts receivable – These are sales on credit, which customers must pay for at a later date.
  • Inventory – This is items held in stock, for eventual sale to customers.
  • Fixed assets – These are more expensive assets that the business plans to use for multiple years.
  • Accounts payable – These are liabilities payable to suppliers that have not yet been paid.
  • Accrued expenses – These are liabilities for which the business has not yet been billed, but for which it will eventually have to pay.
  • Debt – This is cash loaned to the business by another party.
  • Equity – This is the ownership interest in the business, which is the founding capital and any subsequent profits that have been retained in the business.
  • Revenue – This is sales made to customers (both on credit and in cash).
  • Cost of goods sold– This is the cost of goods or services sold to customers.
  • Administrative expenses – These are a variety of expenses required to run a business, such as salaries, rent, utilities, and office supplies.
  • Income taxes – These are the taxes paid to the government on any profits earned by the business.

Transaction Data Entry 

Transaction Data Entry can be defined as how information about transactions is entered into these accountants. There are two ways to do so which are mentioned below.

Software Module Entries 

If you are using accounting software to record financial accounting transactions, there will most likely be on-line forms that you can fill out for each of the major transactions, such as creating a customer or invoice or recording a supplier invoice. Every time you fill out one of these forms, the software automatically populates the accounts for you.

Journal Entries 

You will be able to access a journal entry form in your accounting software, or create a journal entry by hand. There is a great deal to journal entries. Generally speaking, a journal entry must always impact a minimum of two accounts, with a debit entry being recorded against one account and a credit entry against the other. There can be many more than just two accounts, but the total dollar amount of debits must equal the total dollar amount of credits. See the journal entries article for more information.

The General Ledger

The accounts are stored in the general ledger. This is the master set of all accounts, in which are stored all of the business transactions that have been entered into the accounts with journal entries or software module entries. The general ledger is the document you use to gain to all of the detailed financial accounting information about a business.

If you want to understand the detail for a particular account, such as the current amount of accounts receivable outstanding, you would access the general ledger for this information. In addition, most accounting software packages provide a number of reports that give you better insights into the business than just reading through the accounts. In particular, there are aged accounts receivable and aged accounts payable reports that are useful for determining the current list of uncollected accounts receivable and unpaid accounts payable, respectively.

The Financial Statements 

The general ledger is also the source document for the financial statements. There are several financial statements, which are mentioned below. Other less-used elements of the financial statements include; the statement of retained earnings and a large number of accompanying disclosures.

Balance Sheet

The balance sheet lists the assets, liabilities, and equity of the business as of the report date. A balance sheet can be best described as a financial document that serves a purpose to communicate exactly how much a company or organization is worth or to understand the businesses its so-called “book value.” A balance sheet achieves this by listing out and tallying up all of a company’s assets, liabilities, and owners’ equity as of a particular date. This date is commonly referred to as the “reporting date.”

A balance sheet is valuable is because it can be used by potential investors to decide whether to invest in a company, business owners to craft more effective organisational strategy and employees to adjust their processes to better reach shared organisational goals.

Income Statement

The income statement consists of information about the revenues, expenses, and profit or loss of the business for a specific period of time.

Statement of Cash Flows 

The statement of cash flows lists the cash inflows and outflows generated by the business for a specific period of time. It may be formatted using the direct method or the indirect method.