Financial accountancy
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Financial accountancy (or financial accounting) is the branch of accountancy concerned with the preparation of financial statements for external decision makers, such as stockholders, suppliers, banks and government agencies. The fundamental need for financial accounting is to reduce principal-agent problem by measuring and monitoring agent's performance.
The accounting equation (Assets = Liabilities + Owners' Equity) and financial statements are the main topics of financial accounting.
A financial accountant must equal assets with liabilities and owner’s equity. The balance sheet (or the statement of financial position) is the financial statement that summarizes the assets, liabilities, and owners’ equity of the company.
Meaning of the accounting equation
The value of a company can be understood simply as the useful assets that ownership of a company entitles one to claim. This value is known as Owners' Equity. Some assets of a company, however, cannot be claimed as equity by the owners of a company because other people have legal claim to them - for example if the company has borrowed money from the bank. The value of a resource claimable by a non-owner is called a liability. All of the Assets of a company can be claimed by someone, whether owner or not, so the sum of a company's equity and its liabilities must equal the value of its Assets. Thus the accounting equation describes what portion of a company's assets can by claimed by the owners.
Various account types are classified as 'credit' or 'debit' depending on the role they play in the accounting equation.
Assets = Liabilities + Equity (move assets to the right)
0 = −Assets + Liabilities + Equity
or
0 = (−) Assets + Owners' Equity (+) Liabilities . _____________________________/\____________________________ . . / + Retained Earnings (+) Common Stock \ . . _________________/\_______________________________ . . . / (−) Expenses (+) Beginning Retained Earnings \ . . . (−) Dividends (+) Revenue . . \________________________/ \___________________________________________________/ (−)increased by debits (+)increased by credits
simple mapping:
subtracting from a negative absolute value
Thus ---------------- ---------- account increases its --------------
debiting a debit balance
External links
- Financial Accounting Standards Board (http://www.fasb.org)
- American Institute of Certified Public Accountants (http://www.aicpa.org)
- International Accounting Standards Board (http://www.iasc.org.uk)