The concept of accounting refers to a science or a technique whose objective is to provide useful information for making economic decisions. Accounting, therefore, analyzes equity and its movements, reflecting the results in financial statements that summarize an economic situation.
Accounting can be understood as a science since it generates systematic, verifiable and fallible knowledge, while it is also a technique since its procedures allow data to be processed and applied.
The adjective financial, on the other hand, refers to what belongs to or related to the public Treasury, commercial business or stock market and banking issues.
The notion of financial accounting, therefore, refers to accounting that produces and delivers information on the economic status of a company to interested agents (investors, clients, etc.). This accounting, also known as external, is officially regulated.
Financial accounting collects, records, classifies, summarizes and reports the operations that can be quantified in money and carried out by an economic entity. What accountants do, ultimately, is reflect the economic history of a company. The financial statements allow executives to make decisions and report data required by shareholders or state bodies.
Among the activities of those responsible for financial accounting of a company, we can mention the systematic and chronological recording of operations and the delivery of reports on financial movements to whom it corresponds.
This makes it possible to determine which is the asset and which is the liability of a company, knowing its profits or losses. Financial accounting is also necessary to carry out a correct settlement of taxes.
General principles of accounting
It is a unit that carries out economic activities and is made up of combinations of human, natural and capital resources, which are coordinated by an authority that focuses its decisions on achieving the objectives for which it was conceived. An entity can be a legal or natural person, or a combination of both and is not limited to the legal constitution of the parts that comprise it.
Financial accounting emphasizes the economic plane of events and transactions, even when the legal form differs and requires a different treatment. Therefore, transactions and events should be considered, recorded and disclosed according to their financial sense and reality, as opposed to a mere observation of their legal form.
The data that is quantified represent an important aid for the communication of economic information and for rational decision-making.
Unit of measurement
Money is a fundamental element for economic activity and, therefore, for financial accounting, as it allows measurement and analysis. Despite not being the only unit of measurement, money is the means that allows the most effective expression of material and service exchanges, as well as the economic effects that events have on the entity.
To correctly understand the structure of the entity and its connection with others, it is essential to present in an accounting manner the economic resources that it has at its disposal to achieve its objectives and their sources.
Financial accounting considers the entity as a business that operates and will continue to do so in the future ; in other words, it does not anticipate its eventual liquidation or substantial reduction of the scale of its operation.
One of the tasks of financial accounting is to quantify the operations carried out by an entity with other members of the economic activity, as well as the events that may affect it, and this is usually done in monetary terms. Some of the events and operations that are taken into account are economic transactions, internal transformations that alter the structure of sources or resources and any external event that may have a monetary impact on the entity.