Financial accounting: understand what it is and its characteristics

One of the most important aspects of running a business is financial accounting .

And do you know exactly what that is?

Some people believe that it is possible to start and manage a company without knowing a little about this area – and using it correctly.

Others believe that financial accounting comprises only spreadsheets, numbers and data that must be reported to the government and other interested parties.

More than a tool to comply with legal obligations – which, when neglected, can cause a huge headache for organizations – it is fundamental for strategic management .

Financial accounting assesses all quantitative and qualitative variations that occur in the company’s equity, brings relevant information for the control of operations, facilitates planning and, consequently, is an important support for decision making .

For those who are not in the field, the language can be difficult to understand, but at the same time, it is not a seven-headed bug. And that is exactly what this article seeks to clarify.

We will explain the characteristics and the main financial accounting reports .

Good reading!

What is financial accounting?

What is financial accounting?

Financial accounting is a branch of accounting that seeks, mainly, to collect and process all financial and accounting data of a company – which includes billing, expenses, equity, investments, among others.

In this way, it acts as a tool not only administrative, but also strategic, since it provides relevant information about the company to owners, shareholders, managers, investors and possible partners.

In addition, it monitors all changes in the company’s equity since its formation.

Data that are essential for the manager to follow the evolution of the financial health of the business in a more concrete and assertive way .

But more than that, financial accounting is carried out with a focus on external stakeholders .

That is, it seeks to present solid and concrete information about the company to agents who work outside the organization, but are interested in it, as is the case with investors and shareholders.

For this reason, it is directly linked to the country’s tax requirements and legal requirements .

It is an accounting branch that collects and analyzes information over a specific period, following legal standards and norms.

This allows the collection of transparent and reliable accounting data , in addition to making comparisons about the company’s financial positioning, profitability and performance in a more clear and objective way.

Differences between financial accounting and management accounting

The main difference between financial and managerial accounting is in the way they are carried out , since one focuses on internal users and the other on external users.

While the financial is prepared for the knowledge and evaluation of the company’s external users, the data and information made available by management accounting are used internally, by the company’s managers.

In this sense, we can say that financial accounting groups values ​​and data in documents that follow principles and standards – based on Brazilian legislation , in this case – for evaluation and preparation, such as the balance sheet.

In the case of management accounting, the entire focus of the documentation is focused on planning and controlling the use of company resources.

Thus, it is based on financial accounting information and values ​​to perform the interpretation of the data for an administrative decision making .

That is, while management accounting consists of transforming financial statements into management information and analysis for decision-making, financial accounting is the result of an organization’s need.

This is because it makes essential data available to the company , such as its production costs, expenses and expenses in the areas, revenues and receipts, equity, etc.

Therefore, it is the area that records costs and revenues in real time, showing the company’s current financial situation.

In addition, financial accounting is based on historical data, while management accounting has a greater emphasis on the future to support decision making within the company.

Another major difference between the two is that financial accounting must be disclosed (through legal advertising in communication vehicles, for example), a mandatory legal action for future audits .

In management, there is no need for broadcasting, since it is performed only for the organization’s internal use.

Finally, financial accounting brings only monetary information from the organization, while management also presents non-monetary data, such as the amount of raw materials used or sold, number of employees, etc.

Differences between financial accounting and business accounting

In the case of commercial accounting, the main difference lies in the fact that it is specifically aimed at controlling commercial companies .

In other words, it is a more specific branch of accounting that acts directly in the registration of administrative facts, measuring the commercial assets – set of assets, rights and obligations – that result from the management of wholesale or retail companies.

In this sense, it acts to offer information on composition and variations .

Financial accounting, on the other hand, is more comprehensive and is applied to companies and organizations of the most diverse segments and sizes.

What is the purpose of financial accounting?

What is the purpose of financial accounting?

One of the main objectives of financial accounting is to comply with legal obligations related to the company.

When a company operates without financial accounting, it is possible that it will face major problems in the future.

In addition to legal issues, financial accounting aims to appreciate the analysis of previous business data, including its financial history.

Everything to establish a timeline of the company’s financial health and its current situation.

This allows a more secure and concrete transfer of the company’s finances to all its external agents.

Financial accounting also aims to study the assets of organizations, being conceptualized as fundamental in business language.

In this way, it gathers and analyzes data , and with this, it is able to make more assertive and relevant comparisons.

The principles of financial accounting

The principles of financial accounting

As we saw earlier, financial accounting seeks to bring a real view of a company’s financial health .

To achieve this result, she prepares the financial statements, observes accounting principles, calculates sales costs , evaluates the past, uses standards and focuses, mainly, on the financial analysis of company information.

In this sense, to bring an accurate and secure analysis , financial accounting has three main documents or reports.

We will talk about them below.

Balance Sheet (BP)

Essential for controlling all costs and monitoring the company’s equity situation, the Balance Sheet (BP) presents all the assets (assets and rights) and liabilities (debts and duties) of the organization.

Through it, it is possible to have a more consolidated view of the organization’s evolution in the analyzed period, in addition to understanding whether its accumulated equity is growing or decreasing.

Because of this, many compare BP to a company’s financial x-ray .

This is because the instrument makes it possible to understand how the organization is in economic terms , where and how the resources generated were applied.

It also demonstrates its ability to produce cash, settlement, inventory rotation, its indebtedness or profitability, among other data.

But, for this, when preparing a balance sheet, the accountant or the team responsible for it must organize it as follows :

  • First, accounting facts are recorded – all transactions and changes involving the company’s assets, rights and obligations
  • Then, the accountant must record these data in the daily book
  • After this step, all accounting records must follow accounting principles taking into account the accrual basis, which is a very important data for cash flow
  • Finally, it is necessary to group the accounts by their liquidity. In other words, the most liquid ones – which turn into money more quickly – appear at the top of the balance sheet
  • As they become less liquid, they are placed at the bottom of the document.

With this, it is possible to have an enlarged view of the equity and a more detailed view of the company’s resources, as well as data from other sources and the application of resources.

Statement of Income for the Year (DRE)

Also known as DRE, the Statement of Income for the Year, is another extremely essential document in financial accounting.

It is the one that synthesizes in a more complete and direct way all the company’s activities, whether operational or non-operational, in the specific period, showing whether there was profit or loss .

This document is usually drawn up after a period of one year, mainly due to legal disclosure obligations.

Many companies, however, produce the DRE on a monthly basis for management purposes, as it is a very useful tool for analyzing the organization’s results .

This allows managers to have a more concrete view of the company’s financial situation, which leads them to make more informed decisions.

Therefore, we can say that the main objective of the Statement of Income for the Year is to show whether there was profit or loss in the period under analysis .

To this end, all financial transactions of the company must be analyzed, which will allow to know the exact values ​​of the inflows and outflows, in which products and situations the incidence of taxes and the profit margin of that period occurs .

According to Law 6,404 – art. 187 , the structure of a DRE must contain:

“I – gross revenue from sales and services, deductions from sales, rebates and taxes;

II – net revenue from sales and services, cost of goods and services sold and gross profit;

III – selling expenses, financial expenses, deducted from revenues, general and administrative expenses, and other operating expenses;

IV – operating profit or loss, other income and other expenses; (New wording – Law nº 11.941, of 2009)

V – the income for the year before income tax and the provision for tax;

VI – the participation of debentures, employees, administrators and beneficiary parties, even in the form of financial instruments, and institutions or assistance or pension funds for employees, which are not characterized as an expense; (New wording – Law nº 11.941, of 2009)

VII – the net profit or loss for the year and its amount per share of the share capital.

  • 1º In determining the result of the exercise, the following will be computed:
  1. a) revenues and income earned in the period, regardless of their realization in currency; and
  2. b) the costs, expenses, charges and losses, paid or incurred, corresponding to these revenues and income. ”

Cash Flow Statement (DFC)

The last of the main financial accounting documents is the Cash Flow Statement, or DFC.

It presents all the inputs and outputs that involve a company’s financial data within a specific period, not only in cash, but also in bank accounts and in investments and investments that have immediate liquidity.

That is, it is the document that allows the manager to analyze and evaluate how the company is economically.

In the end, this makes it possible to develop a financial plan that is more robust and appropriate to your reality.

In this way, the manager is able to prevent the company from running out of cash or “in the red”.

It is a posture that allows the company to honor all its commitments, in addition to evaluating the best investments and investment options.

Mandatory for several types of companies, the DFC must be presented at least once a year, along with the other documents and accounting reports that are part of the company’s balance sheet.

It is through the Cash Flow Statement that external agents and audits can assess not only the company’s financial health, but also identify errors and possible accounting fraud .

For that, the structure of the DFC must be carried out around three main activities:

  • Operational activities: all movement of resources resulting from the main activity of the company – DRE data and balance sheet
  • Investment activities: use of leftover cash in applications that aim to obtain future benefits for the company
  • Financing activities: use of funds borrowed from third parties or from the owners, due to a shortage of cash.

How financial accounting supports business management

How financial accounting supports business management

Throughout this article, it was possible to realize that financial accounting is a tool that allows to keep the company’s finances organized .

And that is fundamental for any organization that wants to optimize its activities and improve its results, is it not?

It is exactly in this sense that financial accounting supports business management.

It allows greater financial control , avoiding the accumulation of debts, acting as a support tool in decision making and, mainly, seeking competitive advantages, ways to optimize resources and increase profits.

It is through financial accounting reports that it will be possible to show your potential partners and investors the strengths of your company and the profitability index, in addition to providing the security they need to invest in your project.

More than that, it shows the government and the market that your company is serious , acts within the law and in a transparent manner , which improves the organization’s image in the market.

Thinking about the internal environment, more specifically in the management of the company, financial accounting allows a more assertive analysis of the company’s costs .

It is what helps the manager to identify where it is necessary to negotiate and if the expenses are within their reality, as well as making adjustments in investments or a better distribution of costs between the areas.

In addition, it also generates a greater basis when carrying out or adapting the company’s financial planning , since it brings concrete and solid data on the cash position.

Conclusion

Essential to the smooth running of any company, in addition to being a legal requirement, financial accounting , when properly performed, can be a differentiator and bring numerous benefits to your company.

It is important to know that it can – and should – work together with management accounting, since, however similar they may sound, they both have different focuses.

Using the main financial accounting reports correctly is essential.

The balance sheet, the Income Statement for the Year (DRE) and the Cash Flow Statement (DFC) provide extremely important information to understand the financial health of the company and support decision making ahead of the business.

With this, the data gathered by financial accounting become key elements for good management.

Through competent management , it is possible to reallocate resources, carry out financial planning, raise investments and correct failures.

Do you already use financial accounting in your company? If so, tell us in the comments about your experience and how it has helped your organization!

 

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