Meaning of Financial Accounting Part I

The financial accounting represents the recording of all payment transactions of a company as well as the necessary evaluations of the same. In addition to planning accounting, cost and performance accounting and business statistics, it is part of business accounting. Here you can find out everything you need to know about it.

1. Definition: What is financial accounting?

According to eShaoXing, financial accounting is an important part of corporate accounting and includes all postings and payment transactions that occur in the company. This gives you an overview of your current assets, outstanding and outstanding receivables, as well as your own payment obligations. The goal of good financial accounting is always to be able to present the overall results of the company . Immediately after looking at the figures, you know which accounts have which assets and which changes these accounts have undergone.

The financial accounting is not just a practical matter, but is mandatory for most companies . Freelancers, however, are not subject to any accounting requirements, but they should at least carry out simple financial accounting for the sake of their own overview.

In financial accounting, the accounts are closed after a billing period. Depending on sales and profit, such an accounting period covers a period of three months, a month or even a year. The conclusion is made via the profit and loss account as well as the accounting, in which income and expenditure as well as all assets are clearly broken down. This degree is also used to evaluate the company.

2. The basics of financial accounting

A company’s financial accounting is based on statutory and tax regulations that must be adhered to. The regulations apply to the self-employed and tradespeople. For freelancers and small business owners they do not apply or only to a limited extent. Overall, the financial accounting should provide the company with a basis for its own business activities and evaluation of profitability. In the following we will go into more detail on the fundamentals of financial accounting:

2.1 External accounting – financial accounting simply explained

External accounting is based on bookkeeping, which records all stocks and movements that revolve around a company’s assets and liabilities. It thus provides figures that are also important for the tax office. The company’s taxation is based on these figures. Aids for the presentation of the company’s financial position are the balance sheet, the annual financial statements and the profit and loss account , where possible addressees can be investors, banks and the public in addition to the tax office. The tasks of external accounting are:

• Disposition: Determined figures are processed for management and form the basis for business decisions.
• Documentation: Payment transactions and business processes are documented with the help of receipts, the period is at least six years (note retention periods!).
• Provision of information: The determined and compiled data form the basis for information to the tax office and other authorities.
• Control: The profitability of the company is continuously monitored and recommendations for action can be derived from the figures. The efficiency of the company becomes visible.

External accounting forms the basis for all decisions and investment questions that need to be answered in the course of the financial year. For this reason alone, financial accounting is also important for those self-employed who are not subject to any statutory accounting obligations.

2.2 Financial accounting as part of corporate accounting

Corporate accounting is made up of four sub-areas . In addition to the financial accounting are the budgeting , the cost accounting and business statistics . Financial accounting and the other sub-areas differ greatly. While financial accounting determines the overall result of a company and records all expenses and income for this purpose, cost and performance accounting, for example, goes into greater detail. It determines which services have been created at which costs and for what exactly the costs were incurred. From this, in turn, statements about the profitability of the company can be derived.

2.2.1 Fibu

Fibu is the abbreviation for financial accounting and includes accounts payable, accounts receivable and payroll and financial accounting. These are marked as follows:

Accounts Payable

Accounts payable as part of financial accounting deals with the company’s suppliers and service providers , the so-called accounts payable. The accounts payable is the bookkeeping that includes the current account relationships between the accounts payable and the own company. A company that has an outstanding claim against another company is the same as its vendor; accounts payable and accounts receivable are the opposites that are dealt with in accounting. The accounts payable department keeps an eye on the open invoices of a company and ensures punctual payments. It is important to have an overview of all vendors, if only to avoid dunning fees.

Accounts Receivable

The Accounts Receivable as a counterpart to accounts payable includes all customers and accounts receivable services . The customers of a company are called debtors, the services that have been provided for them are billed against an invoice. Open invoices are receivables that are monitored within the framework of accounts receivable. This gives the company an overview of outstanding claims at all times.

Payroll and financial accounting

The payroll department deals with the payroll of a company, for which an employer is required by law. But it is not just about preparing a monthly pay slip, but also about maintaining the master data of the employees, about managing the annual wage accounts, about the accounting of the employees’ salaries and about the fulfillment of the legal reporting requirements. The payroll accounting is thus part of the financial accounting, whereby an overall overview of the monthly personnel costs can be given.