A Beginner's Blog to Basics of Financial Accounting

Last updated on May 14th, 2024 at 10:59 am

Following an average growth of 8.5% annually across various domains, the growth of the finance sector across India is immaculate. Keeping track of its basic concepts is imperative for aspirants to step ahead and become a part of this revolutionary domain.

Financial accounting is one such concept that a finance aspirant must be well-acquainted with. 

If not, let us take you through a quick guide to explore what financial accounting is!

Understanding Financial Accounting

Financial accounting is the process of recording expenses and earnings, summarising them, and reporting those transactions within a specified period. This branch of accounting works across ethical and accurate management of financial records that any individual, company or organisation is responsible for. 

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From accounting revenues and expenses to keeping records of assets and liabilities, financial accounting oversees all sorts of financial transactions. While maintaining a neat record, effective financial accounting can help individuals and businesses navigate their expenses and resort to better economic practices in the long run.

While financial accounting is a part of our daily lives, only qualified professionals are sought to manage this domain. Experts with qualifications like a US CMA course or CA are best suited to take responsibility for this critical area.

Elements of financial statement:

A financial period can span from weeks, to months, to quarters or even calendar years. However, the financial transactions are typically prepared and reported at the end of 12 months, which may vary based on country, industry and company size. This gives an idea about the financial success or failure of any organisation. 

A Beginner's Blog to Basics of Financial Accounting

Assets

Assets are controlled and owned by business organisations for their future usage. These are tangible items like cash and intangibles like patents, goodwill and copyrights. Fixed assets comprise machinery, vehicles, buildings or even the land on which the business is established. 

Liabilities

Liabilities comprise the amount of money which the organisation or any person owns. The standard form of liability is accounts payable, which is short-term. This refers to the promise of paying the other party for a product or service. Long-term liabilities refer to mortgages in business. 

Equity

Equities refer to the claims which are made by the owners on the assets. This is done after all the debts are paid off. In order to apply for the CMA exam, a basic understanding of these key aspects is a necessity. 

Income

This is the money that the company makes from regular business operations. The income refers to the taxes, interest payments, or different financial activities done before accounting for the expenditures. 

Expenses

Expenses comprise the money which is spent on regular business operations. You can calculate the expenses before accounting for the income or the revenues generated by your company.

Profit: Income> Expenses

Loss: Income< Expenses 

3 golden Rules of Accounting

There are three golden rules of accounting:

Rule 1 is for the real account: "Debit what comes in - credit what goes out."

This is applied to the company's existing accounts, which consider both tangible and intangible assets. The capital of the company is considered a liability and can be used as a credit balance. 

Rule 2 is for personal accounts: "Credit the giver and Debit the Receiver."

Individuals use personal accounts for their own needs. When an artificial entity donates, it becomes an inflow for a company. The receiver is debited, and the company is credited in the accounting books. 

Rule 3 is for a nominal account: "Credit all income and debit all expenses."

This is applied to nominal accounts- which have accounting transactions for a year. This is where tangible accounts are taken into consideration. 

Basic accounting equation

A basic question in your CMA certification exam can be asked about the equation for financial accounting:

Assets= Liabilities+ Capital of the owner- Drawings made by owner+Revenues-Expenses

Steps of the accounting cycling process

An accounting cycle refers to a chain of steps that accountants navigate to record, summarise and report financial transactions of any organisation.

The different steps of maintaining and managing the company’s financial systems of an accounting cycle are-

  1. Identifying financial transactions in business
  2. Recording those transactions
  3. Fixing the double entries or any anomalies
  4. Posting to a general ledger account for the debit and credit balance
  5. Calculating the unadjusted trial balance
  6. Resolving calculation errors
  7. Considering the extenuating circumstances
  8. Creating financial statements
  9. Closing the trail balance and the account book

Principles of financial accounting

The five basic principles of financial accounting that a financial accountant must learn are:-

Revenue recognition principle

Revenues are recognised by the income statement of the company. 

Cost principle

The acquisition price of the assets being purchased needs to be kept in an orderly fashion in the business expenses. 

Matching principle

The revenues should be matched with the expenses in the same accounting period.

Full disclosure principle

Financial statements should be complete and not misleading any of the stakeholders associated with the business. 

Objectivity principle 

Accountability and accuracy are two vital principles during the accounting and recording of financial statements. 

Here we conclude some of the basic principles of financial accounting that all aspirants must be familiar with. While these are the core concepts, stepping up to further build your knowledge trove is essential to keep up with the changing trends and introduced financial technologies.

If you wish to strengthen your financial skills by upskilling check out CMA Certification offered by Imarticus Learning. The main motto of the program is to help aspirants “Conquer the World of Accounting and Finance.” 

Master your core skills in financial accounting and get a chance to be placed in a Fortune 500 company and get a salary hike of up to 58%!

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