Financial Accounting For Dummies Cheat Sheet (2)

Financial AccountingAs construction companies deal with rising labor and material costs, many are looking at other areas of their business to keep costs in check. Also the law states that accounting statements should be sent to shareholders and a copy must be lodged with the registrar of companies for public viewing. In order to provide a useful service to users, financial information should possess certain qualities for example, relevance, reliability, comparability and understandability. Accounting information is used to provide users with an overall picture of the financial position and performance of the business. Profit and loss account – is designed to show the firms activities and generated revenue over an accounting period as well as all relevant costs experienced in earning that revenue.Financial Accounting

Shareholders – the business is legally required to provide shareholders with accounting information in the form of company reports. Managers – managers run the organization on behalf of the owners and they use accounting information to pinpoint areas of inefficiency and to help them plan and set budgets. Accounting information is the main means of communication between the business and stakeholders.

Lenders – financers have lent money to the business and are interested in accounting information to assess if the organization can repay the money borrowed and make interest payments. Creditors – companies which are going to supply goods on credit will examine accounting information of their customer’s ability to pay, its financial stability and how long it takes on average to pay back debts. Competitors – competitors use financial information to keep a step ahead of rivals as well as to assess the threat posed by other businesses to profitability and market share.

Standard costing: In standard costing, a cost is predicted in advance of production, based on predetermined standards under a given set of operating conditions. To achieve this, we have to compare the profit/loss ascertained under the cost accounts with the profit/loss arrived at under the financial accounts. By preparing a reconciliation statement, we can find out the causes of the differences in the cost and financial accounts. Integral or integrated accounting is when cost and financial transactions are unified.

In integral or integrated accounting, cost and financial transactions are not kept separate. When the cost and financial transactions are kept separate, the method followed is called non-integral or independent accounting. Need of reconciliation of cost and financial accounts arises only when non-integral accounting method is followed. The maintenance of cost accounts and financial accounts in a single set of books is known as integral accounting. In other words, it’s the merger of financial and cost accounting by using a single set of books of accounts.

Financial Accounting