December 7th, 2019 | Updated on November 18th, 2022
When a normal person comes across the word ‘accounting’, the popular belief is that the world of financial accounting is highly complex.
Though this understanding is true to some extent, the matter of the fact is that before this term was coined; accounting was still being used in form or the other.
In very simple terms,
Accounting is a simplified process of recording and analyzing the financial details of the organization/enterprise.
Even when you are dealing with a local vegetable vendor, you are making use of financial accounting.
The primary focus of Financial Accounting is on statutory reporting i.e. the reports that are created as a part of financial accounting are available to the stakeholders and the general public.
The reports show the financial performance of the company which is available for the investors, suppliers, creditors, customers of the company.
On the other hand, management accounting focuses on financial reports that are used for internal use by management.
Financial Statements which are a key to financial accounting or business accounting constitute the quarterly & annual financial statements.
When these statements are presented to the key stakeholders like investors, financers, regulators, etc.
It gives an indication that the organization is adhering to the norms required to run an enterprise.
These statements are also used for arriving at critical business decisions that should be taken for the goodwill of the business (either in the short-term or long-term).
The Three Major Statements That Are Generated As A Part Of Business Accounting Are Below:
Profit & Loss (P&L) Statements
Business owners have to regularly inspect the profitability of their business so that they can take corrective actions in case required. P&L statements (also called as Income Statements) are generally generated quarterly/yearly/both.
The formula being used for calculation of Net Income is
- Revenues – Expenses = Net Income
These statements give an indication of whether the enterprise/organization has incurred loss or generated profit during a particular accounting period.
Balance Sheet
The balance sheet gives an indication of the financial position of the enterprise for a particular date or particular time period. It gives a clear indication of the assets & liabilities that the enterprise owns at the end of an accounting period.
There are various companies who provide comprehensive balance sheet formats that help businesses to update and record their overall finances including assets, liabilities and equity held.
Capital is the excess of assets over liabilities. An enterprise is considered to be cash-flow positive if it is able to settle debts, its liquid assets are increasing, is able to pay expenses, and is able to return the money to its shareholders.
The formula being used is below:
- Assets = Stockholders’ Equity / Owners Equity + Liabilities
Cash Flow Statements
It shows the cash inflows & outflows over a specific period of time (yearly/quarterly/monthly). It also takes into account the investing and operating activities of the enterprise.
The formula being used is below:
- CFS = Net cash flows from operating activities (+) investing activities (+) financing activities.
Apart from this, the statement of retained earnings is also included as a part of the financial statements for an enterprise.
As the size & scale of business grows, the complexities involved in running day-to-day operations of the business also increases.
Enterprises have to ensure that they are following the required statutory compliance laws and financial statements are filed with the Registrar of Companies (ROC).
If the enterprise is publicly listed, the same should also be filed with the relevant stock exchanges (BSE/NSE).
Financial accounting ensures that the enterprise is adhering to the legal requirements and gives a clear view of the financial position of the business.
A good Enterprise Resource (ERP) software or business accounting software should be used to keep a track of the financial transactions of the enterprise.
Tally.ERP 9 is a business accounting software from Tally Solutions which enables to record transactions related to the business in journals or subsidiary books like sales book, etc. and preparing financial statements. The software is suited for SMEs as well as large enterprises as it is highly secure and scalable.
Invoicing, GST billing, generation of statements regarding the assets & liabilities of the enterprise, generating cash-flow statements, etc. are possible via this robust business accounting software by Tally Solutions.
Conclusion
Following the right accounting principles & practices and timely availability of financial statements helps in building investor’s confidence. It also helps in the overall growth of the enterprise/organization.
