Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions pertaining to a business. This involves the preparation of financial statements available for review by the owner or management.
A financial statement is a formal record of the financial position of a business as at a specific date. A balance sheet is report which sets out the assets, liabilities and owners’ equity (interest) in the business.
A profit and loss statement matches the revenue of the business against the expenses. The difference is a profit where revenue is greater than expenses, or a loss for the inverse. A profit statement covers a period of time, typically an individual month or a financial year. By preparing statements for every month of the year, it is possible to compare one month to the next, or analyse one month against the same month of the previous year.
A budget is a financial plan for the future. It concerns predicting the revenues and costs of a business. Budgetary control is the process by which financial control is exercised within an organisation. A well-constructed budget will set goals and objectives for revenue and also limitations upon spending and the withdrawal of funds by the owners. Budgeting requires experience and a thorough understanding of the business, something which the team at HPW Accounting is skilled at.
Once an accountant has the essential financial data of a business in hand, the next step is to delve deeper and conduct a thorough examination of the firm. This will involve an scrutiny of cost drivers, classifying costs into fixed or variable and then also calculating a range of ratios. The analytic data which is gathered will, to a trained professional, tell a story about the business. The various ratios can also be used for a basis of comparison from one accounting period to the next, to highlight both positive and negative trends.