Financial Accounting – 4 ways to calculate Accurate

What is financial accounting?

Financial accounting is a branch of accounting that deals solely with financial transactions. Transactions that can be quantified accurately and expressed in monetary terms are termed financial transactions. Financial accounting is concerned with the recording, analyzing, summarizing, and reporting of financial data in the form of financial statements.

Such statements are prepared by experts in this field by following some set rules and guidelines. 

Financial Accounting
credits – omniaccounts

You might wonder who prepares these rules and guidelines? The US-based Financial Accounting Standards Board (FASB) has set these standards. monetary accounting is prepared according to an established set of principles known as the Generally Accepted Accounting Rules (GAAP). These rules and standards are universally acceptable and are followed by accountants religiously.

Easy understanding and comparability of the financial statements is the primary objective of following a uniform process of economic calculation. 

Three main Financial Statements are prepared to complete the cycle of financial accounting:

Statement of Profit and Loss

This statement records the major expenses and income heads. The difference between the expenses and incomes is recorded as the net profit or net loss as the case may be. This shows how efficient a business concern has been in a particular year.

Balance Sheet

It shows the assets (e.g., investments and machinery) and the liabilities (e.g., creditors and bank loans) of a company. Also records the shareholder’s funds and reserves that together form the capital of the business. The balance sheet shows the health and wellness of a business concern.

Cash Flow Statement

This is an essential task undertaken to track the actual cash inflow and cash outflow during a financial year. Since economic analysis is done on an accrual basis, transactions that fall due but will take place at a later period(year) are also recorded. Necessary adjustments are made for such cases. Also, adjustments are made for non-cash transactions to find out the actual cash inflow/outflow. 

E.g., depreciation is a non-cash transaction, it might be a loss for the company but there is no payment(outflow) done for that. Even then, it is recorded in economic analysis as an expense/loss because the loss can be quantified (financial transaction). This has led to a decreased net profit. Now, in the cash flow statement, the depreciation amount will be added back to the net profit to find the actual cash balance.

Why is financial accounting important?

These financial statements are prepared for internal users as well as external users. That being said, financial statements are more useful for external stakeholders like creditors, competitors, investors, and so on. A company’s strength or weakness is evident from its financial statements. Hence, they provide a database for the stakeholders to make informed decisions. For, the creditors can decide whether to extend further credit based on the number of assets on the Balance Sheet. The competitors can keep a close look at the money habits of their rivals. Investors can decide whether to invest in a particular firm after comparing its net profits with those of similar firms.

It is more than just a systematic record of financial transactions. Uniformity, universality, and easy comparability add to the charm and utility of economic analysis.

Best practices for financial accounting

Efficient economic analysis enables organizations to unlock growth opportunities, monitor spending, and optimize resource allocation. However, it can be challenging without a well-planned strategy.

Here are a few best practices enterprises follow to mitigate risks and boost profit margins.

  • Keep personal and business finances separate to prevent cash flow issues and tax filing complications. 
  • Establish internal accounting policies to minimize risks.
  • Determine the appropriate accounting principle, depending on organizational needs.
  • Use accounting software to track and record transactions and cash flows.
  • Create accurate financial statements for ease of sharing information with stakeholders.
  • Manage accounts payable, receivable, and reconciliation processes efficiently


Economic analysis helps organizations with accurate recordkeeping, which is key to creating financial statements that meet accounting standards and legal guidelines. Organizations following accounting best practices evaluate and optimize their performance more efficiently. As a result, they remain in a better position to weather any financial hardship.

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