What is Financial Accounting?

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For those of you thinking about starting a career in accountancy, you are likely to already be familiar with the topic and what it entails, but here we’ll be discussing accountancy in more depth.

The money that comes in and the money that goes out is a crucial part of any business, and accounting is the measuring of this. The accounting department records these transactions closely to ensure the business is running smoothly. Without this type of acknowledgement, any business may fall into financial trouble. However, with a skilled accountant or department in place, the likelihood of this happening is less. This is because the accounting department can determine the strength and effectiveness of a business.

Accountancy is such an important element to any business and yet many business owners believe they can manage it single-handedly. Unfortunately, for start-up businesses with little revenue, this is most often, the only option. As a business begins bringing in higher revenue, hiring an accountant is the next logical step and if the business continues to grow further, more accountancy professionals are likely to be required, in-turn, forming an accounts team.

What is Financial Accounting?

There are two methods to financial accounting, cash basis and accrual. For smaller businesses, cash basis is the usual method. Cash basis is a popular method with many sole traders or partners, it’s a way to work out your income and expenses for your self-assessment tax return. It’s simply an acknowledgment and records financial transactions when cash physically moves between two parties within a business.

Accrual (also called GAAP; Generally Accepted Accounting Principles) is better suited to more complex businesses with high levels of stock. The accrual method of accountancy tracks all commitments to pay or to be paid and this is generally used by larger businesses. If you’re likely to need to borrow funds for your business, your bank may want to see accounts drawn up, in which case accrual is the preferred method for this.

Why is Accounting Important?

Accounting exists to track the overall performance of a business and to ensure it isn’t losing unnecessary money. It also exists to ensure employees are being paid, obligations such as taxes are met as well as measuring patterns that effect the profits and losses of a business.

Accountancy covers a variety of essential reports to ensure a company works as effectively as possible, such reports include; cash flow, budgets and cash plans, accounts receivable, accounts payable, income statements and balance sheets, not to mention debtors and creditors statements.  When considering the level of work involved with such a level of reporting, it’s no wonder an accounts department may be required for larger businesses.

Without the handling of accounts, there would be no record of transactions and no measure of the finances within a business. No records and no reports would mean an unlikely profit and lack of funding resulting in a failing business. So, for those of you who tend to think of accountancy as a dull or safe profession, do consider the importance of this profession.

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