Financial Accounting is –
- Reporting and
all financial information related to the business. Every business needs to maintain proper accounting records so that all the stakeholders of business like owner, lender, customer, vendor, income tax department, sales tax department etc. should have a clear view of the all the transactions of the business. It is the duty of accountant to record property all business transactions. Only financial transactions are record and events having no financial dealing are not recorded like if the manager of factory got ill then this is an important event as production may get effected. But this event is not directly having any financial value/transaction hence it is not recorded.
In Financial accounting, All financial transactions are recorded with double entry accounting system. In double entry accounting system each financial transaction is having both debit & credit effect to different accounts. Hence total of all debits will always equal to the total of all credits. This feature of double entry accounting system makes it easy to track error of accounting.
Golden Rule sof Accounting
As per double entry accounting system, accounts are of three types:-
- Personal Accounts : Like All name a/c, customer a/c, Vendor a/c, prepaid or outstanding a/c etc.
- Real Accounts: Like all assets a/c, cash a/c, bank a/c etc.
- Nominal Accounts: Like all expenses and income a/c, rent a/c, interest a/c etc.
All three types of accounts have different golden rules of accounting. It means accounts related to any of above category is treated with a different rule. Hence we have Three golden rule of accounting as given below:-
- Personal Accounts : Debit the Receiver, Credit the Giver.
- Real Accounts: Debit what comes in and Credit what goes out.
- Nominal Accounts: Debit all expenses and losses and Credit all income & gains.
In double entry accounting system, all journal entries are recorded following the above three golden rules of accounting. Hence these rules are basis of financial accounting.
Thanks for explaining concept of financial accounting. Please clarity whether rules & standards (accounting standards) of financial accounting are also applicable to cost accounting of not.
Knowledge of cost accounting is most important in making pricing decisions , make or buy decision and product mix decisions.
There are 24 Cost Accounting Standards issued by Institute of Cost Accountants of India for cost accounting. In addition to it there are GACAP (Generally accepted cost accounting principles) to bring uniformity in cost accounting records of various organisations.
Click here to see list of Cost Accounting Standards (CAS) & GACAP.
Click here for pdf file of CAS (Cost Accounting Standards)