Financial Accounting and Its Importance
Financial accounting entails a process of recording, summarizing, and reporting the myriad of transactions resulting from business operations over a period of time. These transactions are summarized in preparation of financial statements, including the income statement, balance sheet, and flow statement, which records a firm’s operating performance over a specific period of time (Garbowski, Drobyazko, Matveeva, Kyiashko, & Dmytrovska, 2019). Any financial accountant’s duty is different from a general accountant, where he/she works for him/herself rather than for a firm. The significant importance of financial accounting is that it helps businesses keep track of their operations and provides a snapshot of their financial health. It also helps a company give investors and lenders more power in their decision-making by providing data through various statements.
The Accounting Equation
The accounting equation is used for double-entry accounting. It helps in showing the relationship between the assets, liabilities, and Equity of a business. A business can see if its assets are financed by debt or through business funds through an accounting equation (Juárez, 2016). Another term used to refer to the accounting equation is the balance sheet equation. The accounting equation necessitates liabilities and Equity to equal assets (Juárez, 2016). This is the accounting calculation: Assets = Liabilities + Equity. Each side of the accounting equation has to equal the other since a business has to purchase things with either debt or capital. Equity has an equal effect on both sides of the equation. Liabilities = Assets – Equity, while Equity = Assets – Liabilities. For example, a business that sells cereals has a starting capital of $10,000. This means that its business assets equal the $10, 0000, and the new company equity is the same. $10,000 Assets = Liabilities + $10,000 Equity.