Collection, summarization, and presentation of the financial information resulting from business transactions is known as financial accounting and reports the operating profit and the value of the business to the stakeholders. In other words, we can say that financial accounting is used for reporting financial transactions to the stakeholders in a format that is acceptable and adaptable by all businesses.
Accounting Concepts that form the basis of financial accounting are:
Accrual concept: Financial accounting can be done on an accrual basis or cash basis and is highly accepted.
In cash basis of accounting, it is required that transactions are recorded only when the transaction results in inflow or outflow of cash.
Once an organization selects the method, it should consistently use the same.
Economic entity concept: This concept separates the owner from the business and provides that no personal transactions are recorded in the books of the business.
Going concern concept: Under this concept, it is assumed that the organization will remain in business for a long time and hence the revenue can be deferred to a different period.
Matching concept: This concept stresses that the expenses relating to a particular income must be recorded in the same period.
Materiality Concept: Material transactions are those transactions if omitted can alter an investors analysis of the business.
Conservatism: A revenue must be recorded only when it is reasonably certain that it will be realized in the near future.
Double entry system
The heart of financial accounting is the Double entry system of bookkeeping. Double entry system refers to recording two aspects of the same transaction. This implies that every transaction will lead to at least 2 entries of corresponding nature and thus will balance both the sides of the accounts. This concept is accepted worldwide with full confidence.