Financial Accounting Simply Explained
Financial accounting is a particularly important area of accounting that captures all the income and expenses of a business. It forms the basis for the income statement and balance sheet and makes a decisive statement about how well a company is doing. This is important not only for entrepreneurs and their future-oriented decisions, but also for investors and creditors.
In the following, we explain in detail what financial accounting is and what areas of responsibility it covers. In addition, we explain the difference between the financial accounting and the business accounting and focus on what lies behind the term “billing period”.
What is financial accounting?
Financial accounting, also known as FiBu for short, is a subarea of accounting. It covers all business transactions that can be expressed in numbers, ie all expenses and income. These financial flows are recorded or booked in chronological order in so-called accounts. It helps with intuitive, easy-to-use accounting software. The accounts differ materially, depending on the type of business transaction that is booked. For different occupations come different accounts in question, which are listed in so-called chart of accounts. At the end of a defined accounting period, the accounts are closed and a balance sheet and a profit and loss account are created. The financial statements of all accounts are posted. There are also specific year-end bookings, such as provisions or inventory valuations. A billing cycle can take a month, a quarter, or a year.
In large companies, financial accounting is split once again into accounts payable and receivables accounting.
Accounts payable covers the payment obligations of the company.
The accounts receivable department contains its receivables.
What is FiBu used for?
The goal of financial accounting is to determine the overall performance of a business to document asset and portfolio changes. How much profit or loss was made in the accounting period? Information about it is not only important for your own company, but also for shareholders or creditors. Financial accounting is required by law for most companies.
Only freelancers and tradesmen who make less than 60,000 euros profit or 600,000 euros turnover (by 2015 50,000 and 500,000 euros) are exempted from the obligation to keep records. The financial accounting must be kept absolutely transparent and comprehensible, because many years later, tax authorities have the right to demand access to financial accounting. Such a process is called a tax audit.
The register serves as a check for financial accounting
Tasks of financial accounting
1. The determination of stocks (statement of balance sheet)
As part of this task of financial accounting, the current debt and assets are documented.
2. The determination of stock changes
How have assets and own or foreign receivables changed? These questions will be clarified in the course of the inventory change determination.
3. The determination of the success (profit and loss account)
This task is closely linked to the identification of stocks. Once all expenditures have been compared to the income, the profit can be determined using the income statement. Success in this case is not necessarily positive. In case of losses, one often speaks of negative success.
4. The determination of the cost price
Costs are all costs for internal services. These are also determined in financial accounting.
Other tasks of financial accounting are
the provision of numbers for the price calculations,
the creation of statistics and evaluations,
the internal control,
Provisions and accruals and
the creation of the advance VAT return.
Financial accounting is also an important source of information for shareholders, creditors and other outsiders.
What is the difference between financial accounting and business accounting?
The company accounting system consists of four pillars: financial accounting, business accounting, statistics and planning. Financial accounting and business accounting are the basis for internal or cross-company statistical comparisons as well as for the future planning. But what is the difference between financial accounting and business accounting?
Tasks of financial accounting
The financial accounting is the financial accounting. It deals with the financial position of the company and its change. This is particularly interesting for stakeholders such as investors. The financial accounting is thus directed primarily to the outside. As a result, the design of financial accounting is also subject to certain legal requirements. This means that all business transactions in the company, ie all revenues and expenses, must be recorded completely. The recording of business transactions always refers to certain periods of time, for example to a month or a quarter. After the end of the financial year, the financial position is determined using the annual balance sheet. This is subject to publication.
Tasks of business accounting
In contrast to financial accounting, the operating accounts primarily have an in-house information function. For this reason, the bookkeeping is also subject to little legal requirements and can be made completely free in the reason. Just like the financial accounting, costs and benefits or profit and loss are also compared with the operating accounts. The business accounting is an important decision-making aid for price calculations and for future-oriented decisions, which must be made in the short term. In addition, the economics of certain measures can be easily controlled using business accounting. The postings of the company accounting are not included in the financial accounting. In addition, they are not required to be published.
What is a billing period?
The billing period is a term from accounting. It indicates the period between two degrees. Here again a distinction is made between different degrees. On the one hand, there is the annual financial statement, which is carried out at the end of a financial year. A fiscal year does not necessarily have to coincide with a calendar year, but can also start in the middle of the year. There are also quarterly and monthly statements whose billing period is three months or just one month.
Why is there the billing period?
Within a billing period, all business transactions are recorded in the accounting department. A business transaction is a transaction, such as a revenue or an expense that affects the corporate budget. The complete recording of all business transactions is not only defined by law, but above all serves to determine the financial success of a company and to classify it correctly. The business transactions are recorded in different accounts.
After each billing cycle, for example after one month or quarter, all accounts are closed. This also means that the previously made postings in the accounts can not be changed. As long as a billing period has not yet been closed, all bookings can be adjusted as required. Moreover, it is possible to book in parallel in two different billing periods, so for example is second and third quarter.
Once a billing period has been closed, it can be forwarded to the tax office or the tax office. It is important to comply with certain deadlines. For example, bookkeeping must be submitted to the tax office no later than the 10th of the following month. For the quarter 1 from the 1st of January to the 31st of March, all bookings must be sent no later than April 10, unless a one-month extension has been requested.