Financial accounting is the branch of accounting that is responsible for collecting, classifying, registering, summarizing and reporting on operations valued in money carried out by an economic entity. Its main function is to historically carry the economic life of a company. It is also known as external or general accounting and, together with administrative accounting and cost accounting, it makes up the typical accounting structure of any organization.
Financial accounting concept
The following definitions allow us to expand the concept of financial accounting:
It is an area of accounting that aims to prepare and produce accounting information for external users. Such information is subject to regulation external to the company (by the state, professional organizations, etc.). (Alcarria, p.16)
It is an information system that allows to measure the evolution of assets or wealth and the results or periodic income of the company, through the systematic recording of the transactions carried out in its economic-financial activity, which leads to the preparation of annual accounts, prepared in accordance with accounting principles and uniform valuation standards, which enables them to be interpreted and compared by economic agents interested in knowing the operation of the company. (Mallo and Polished, p.13)
It is a science applied to measure the evolution of equity, calculated based on its ability to obtain future returns through the combination of assets and liabilities managed by companies, as well as the determination of the result of each financial year, expressed by the difference between the income obtained and the expenses incurred in it. (Mallo and Polished, p.15)
It is the technique by which the operations carried out and the economic, natural and other, identifiable and quantifiable events that affect the entity are recorded, classified and summarized, establishing the means of control that allow the communication of quantitative information expressed in monetary units, analyzed and interpreted, so that the various stakeholders can make decisions in relation to said economic entity. (Javier Romero, cited by Solorio, p.13)
It is a technique that is used to systematically and structured quantitative information expressed in monetary units of the transactions carried out by an economic entity and of certain identifiable and quantifiable economic events that affect it, in order to facilitate the various stakeholders to make decisions in relationship with said economic entity. (Mexican Institute of Public Accountants, cited by Solorio, p.13)
goals
Cuevas (p.2) suggests that the main purpose of financial accounting is to provide information about the organization on:
- its operating results, its financial position; and its cash flows.
According to Galindo (p.17), financial accounting has two basic objectives, namely:
- Report on the economic-financial situation of the company and on the profit obtained by it. The economic and financial situation has to do with the business assets. Record the operations that the company performs, creating memory in the company at an economic level.
characteristics
Some of the commonly cited characteristics of financial accounting are:
- Reporting to third parties on the financial movement of the company Covers all business operations in a systematic, historical and chronological way It must necessarily be implemented in the company to timely report the facts developed It is used as common language in business due to its obligation. It is based on accounting rules, principles and procedures for recording the financial operations of a business. It describes the operations in the analytical gear of double entry bookkeeping.
Mallo and Pulido (p.13) establish, as basic characteristics of administrative accounting, the following:
- The central idea is based on discerning the economic relations between the main subject entity of the company's accounting (represented by the owners' net worth), and the rest of the agents that are related to it through various contracts. In practice, this method is based on the conventional duality between the assets or investments made by the company and its corresponding external or own financing, which is known as double entry, and which involves maintaining a continuous balance between assets and liabilities, both in each of the transactions and in their aggregates, which make up the Annual Accounts. The fundamental equation of the company's equity is as follows:Assets = Callable liabilities + Equity Establishes the homogenization of the values of the equity elements in a common currency, which in turn allows them to be expressed in other currencies, through their conversion when applying the corresponding exchange rate. Through the development of the different accounts. that make up a Chart of Accounts, captures, measures, represents and values in monetary units the variations of the assets, as well as the income and expenses of each period. It works under the assumption of continuity of the activities of the companies of an economic and financial, so that the real results of a company could not be known until its final liquidation; however, it is complemented with periodic accountability. Definitely,records transactions that affect equity from the beginning of the year to the end, as shown in the periodic balance sheets prepared.
Differences and Similarities Between Financial Accounting and Management Accounting
Differences
Alcarria (p.17) synthesizes them in the following table:
| External users | Internal users | |
| Reports | Annual accounts | Internal reports |
| Information types | Historical | Historical and pension |
| Elaboration rules | Commercial regulations, among which the General Accounting Plan stands out | They do not exist. The management sets its own standards |
| Accounting principles and criteria | Those established in the accounting regulations | Any measure considered useful, monetary or non-monetary. |
| Periodicity | Usually yearly | When necessary |
| Aggregation level | Aggregate company-wide information | Desired level of disaggregation or detail |
| Denomination | Financial Accounting | Administrative accounting |
Similarities
Cuevas (p.6) raises the following:
- The same considerations that GAAP make for financial accounting purposes are common to the relevant management accounting purposes. For example, management cannot rely on systems lacking verification, subjective estimates of utility, etc., which obeys the same idea that the concepts of costs and income are based on objectivity. Operational information is used both in the preparation of financial statements as in managerial accounting. Therefore, there is a basic assumption to collect the information: proceed in accordance with Generally Accepted Accounting Principles; doing it any other way would mean duplicating the task.
In the following video, from the School of Business and Management, an introduction to the concept of financial accounting is made, a good opportunity to complement the concepts already exposed in the text.
Bibliography
- Alcarria Jaime, José J. Financial accounting I. Publications of the Universitat Jaume I. 2008. Galindo Bueno, José Antonio. Costs and financial accounting in the agri-food business: an introduction. Ed. Univ. Politéc. Valencia, 2004. Mallo, Carlos and Pulido, Antonio. Financial Accounting. A current approach. Editorial Paraninfo, 2008 Solorio Sánchez, Eva Raquel. Financial Accounting. Xlibris, 2012.
