Financial accounting is a discipline which includes identifying, collecting and recording of raw monetary data, analysis of the data to turn it into financial information and reporting the information to end users to enable them to make informed financial and investment decisions.
Steps in financial accounting
The steps to be followed in a financial accounting system include;
- Identification of financial data
- Source documents like receipts, invoices and credit and debit notes.
- Collecting and recording of raw monetary data.
- Recording in books of original entry called as Journals or day books.
- Analysis of the data to turn it into information
- Transferring recorded data to ledger books or “T” accounts
- Extracting the trial balance from records in ledger book account balances
- Preparing final accounts, the Trading, profit and loss account and the balance sheet
- reporting the information to end users to enable them to make informed financial and investment decisions
The importance of financial accounting
Financial accounting is important because it enables informed decision making to cater for various needs of different users of the information including, management in budgeting, government in taxing the firm, potential stakeholders in deciding whether to invest in the firm, financial analysts in measuring performance of the firm to gauge against competitor and industry standards.
Financial accounting data and information provides an important reference point for enabling any future resource mobilization and allocation to different uses and investments so as to achieve efficiency and effectiveness in the finances of the firm.
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