What is Financial Accounting? Meaning, Features & Principles

Financial accounting refers to the procedure that involves recording and summarising transactions of money within a business. It assists individuals to learn the amount of money a company makes, spends and possesses.

Example:

Aman is a small shop owner (of fruit). He is keen to determine whether his business is in profit. To keep track of his money, he maintains a simple record:

Key Points:
 

• Financial accounting assists Aman to visualise the amount of sales and expenses daily.
   
• By checking his records, he can know whether he is spending more than his earnings.
   
• Without these records, Aman would not know if his shop is successful.

This is a very straightforward table that shows Aman exactly how his business finances are doing.

Meaning of Financial Accounting

Financial accounting is what is known as the system of recording and organisation of the financial activities of a business. It assists entrepreneurs, stockholders, and others to see the amount of money that is brought in, spent, and saved.

Example:

Aman is a small tea stallholder. He is a tea seller and uses money to pay for milk, sugar, and gas daily. To remember about his earnings and expenses, values, he writes them down in a table:
 

Key Points:
 

• Financial accounting helps Aman know if his tea stall is making a profit or a loss.
   
• By writing down every transaction, he can see where his money is going.
   
• Without these records, Aman might forget how much he spent or earned.
   
• Banks or tax officers may ask for these records to check their business health.

This easy approach makes the business of Aman transparent and assists in making better decisions.

Features of Financial Accounting

A system used to monitor all the money flows in a business is financial accounting. It provides a well-defined view of earnings, spending, and general creditworthiness.

Example:

Aman has a bike shop where he repairs bikes. He measures these expenses and payments by using financial accounting, which keeps track of all his payments, hence his expenses. Here is the form of his simple accounting:

Key Features of Financial Accounting:
 

• Record Keeping: Writes down every money transaction (like Aman's repairs and purchases).
   
• Tracking Profit/Loss: Shows if the business is earning more than spending (Aman sees he's currently at ₹400 profit).
   
• Financial Statements: Creates reports like balance sheets (Aman can see his total money situation).
   
• Legal Requirement: Needed for tax payments and bank loans.
   
• Universal System: Follows the same rules everywhere, making it easy to understand.
   
• Helps in Decisions: Aman can decide whether to buy more tools or save money.

This system helps Aman to manage his repair shop successfully without getting confused with money.

Principles of Financial Accounting

Financial accounting follows established principles that ensure proper documentation of business transactions. These principles help make a company’s financial records accurate, reliable, and easy to understand for anyone reviewing them.

Example:

Aman is a small stationery owner. He adheres to accounting rules so that he has clean and honest books for his business money. This is the way he uses them:

Key Principles Aman Follows:
 

• Revenue Recognition Principle: Records income when a sale happens (not when cash is received).
   
• Matching Principle: Matches expenses with related earnings (pen costs vs notebook sales).
   
• Cost Principle: Shows assets at original purchase price (his unsold stock value).
   
• Accrual Principle: Records transactions when they occur (not when money moves).
   
• Consistency Principle: Uses the same accounting methods every month.
   
• Going Concern Principle: Assumes his shop will continue operating.

These principles help Aman keep his financial records accurate, whether he's filing taxes or making business decisions. They also help him avoid errors and provide a true and fair view of his shop’s financial position.

Conclusion 

Financial accounting is a road map, which makes the business owner or in the case of our company, Aman, aware of the correct origins of money and its destinations. The success of Aman's stationery outlet is largely due to his adherence to the basic principles of accounting, which include capturing each sale and purchase, balancing expenses against revenues, and pricing his stock adequately. 

As Aman uses his accounts to know when to purchase more notebooks or save, every business requires accounting, so as to make intelligent decisions. These records not only enable Aman to operate his shop with greater efficiency; they also demonstrate to banks why they should lend him money when he wants a loan, as well as to tax officers that he is paying the correct level. 

FAQs

1. What’s the purpose of financial accounting?

It helps businesses track money coming in (income) and going out (expenses) so owners, investors, and tax authorities can see if the company is profitable.

2. Why do businesses need accountants?

Accountants organise financial data, ensure taxes are correct, and help business owners make smart money decisions.

3. What's the difference between income and expense?

Income is money earned from sales or services. An expense is money spent on business needs like rent or supplies.

4. How often should I update my accounts?

Daily recording is best for small businesses like Aman's shop. Weekly updates work if daily is too busy.

5. What are financial statements?

They are reports showing a money summary, like a profit/loss statement and a balance sheet. Aman uses them to check his shop's performance.

6. Can I do accounting without being an expert?

Yes, simple businesses can start with basic records. Use notebooks, spreadsheets or free accounting apps.

7. What happens if I make accounting mistakes?

Small errors can be fixed later. Big mistakes may cause tax problems or wrong business decisions.

8. How does accounting help with taxes?

Proper records show exact earnings, so you pay the correct tax. No records mean guessing and possible fines.

9. Should I hire an accountant for a small business?

If numbers confuse you or your business grows, an accountant helps. Aman manages alone but may need one later.

10. What's the simplest way to start accounting?

Just track daily sales and purchases like Aman does. Use two columns - money in and money out.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?