Financial data – actual business transactions (for example, sale of goods, provision of services, purchase of assets).
Transactions are supported by certain source documents, which are analyzed and are used as a basis recording transactions Accounting Cycle is a process of analyzing, summarizing and recording transactions, which have an impact on the financial position of a business.
Purpose of this process is to prepare financial statements and have an accurate and timely accounting data based on which interested parties (owners, creditors, suppliers, customers, employees, governmental institutions and other) can judge on the results the business has achieved during a particular period of time, on the assets the business possesses and on the financial means used to finance these assets, i.e. liabilities and owners’ equity.
Process of Financial Accounting is divided into 7 major steps, which compose Accounting Cycle:
Business transactions are recorded in the books of prime entry. Afterwards transactions are analysed in the books of prime entry and the totals are posted to the General Ledger Accounts. At last transactions are summarised in the Financial Statements (Balance Sheet and Income Statement)
It is necessary to understand the difference between Financial and Management Accounting. The table below explains area of each accounting type:
Types of accounting
Financial accounting
Management accounting
Covers reporting results and financial position of a business. Its primary task is not related to provision of information towards improvement of business efficiency and its management, but is to satisfy information needs of interested parties not involved in business management. Only historical information is provided by financial accounting in the strict forms of the reports
Covers provision of information to the management of the business for business planning and controlling purposes. Includes not only historical, but also future (forecasted) information. No strict form of the reports are used
After buisiness transactions are recorded, analysed and summarised Financial Statements are prepared. There are three main types of Financial Statements, i.e. Balance Sheet, Income Statement and Cash Flow Statement.
Business is a complex system in which several groups have specific interests. Objective of Financial Statements – provide information on financial position, performance and change in financial position of a business to a wide range of users to make economic decisions. Such users can be divided into several groups depending on the reasons for which they need Financial Statements of a particular business.
Users of accounting data and financial statements
Management
Responsible for day to day business management. Need information on financial situation of business, i.e. current and expected in the future
Shareholders
Use information to assess performance of the management
Trade partners (suppliers, customers)
Suppliers selling goods need information on security of their sales and payments. Customers buying goods need information on security and stability of their purchases
Creditors
Need an assurance that loans granted to the business and interest on the loans will be paid on time
Taxation authorities
Use information for assessment of taxes, including sales tax
Employees
Need assurance on security of their jobs, future career perspectives
Financial analysts and advisors
Use information to provide services to clients (investors, credit agencies)
Government and its institutions
Use information to allocate resources, for statistical purposes
Public
Businesses are members of public. They contribute to local economy, employment, usage of local resources, environment. Information is used to evaluate such contribution
Each of these groups has a direct relationship to the business and in order to be able to perform its functions adequately they need certain information on the business. Such information they derive from the Financial Statements, which are prepared by Accounting System.
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