What is financial accounting in companies and what is it for?

Business financial accounting is one of the most common types of accounting.

This type of accounting focuses its efforts on collecting, classifying and recording the accounting movements of a company.

In this article we will tell you all the details you should take into account to keep your accounting exercises up to date: what are its main characteristics, its purpose and importance, and its legal aspects.

Take pen and paper, let's get started! 👇

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What is financial accounting in companies?

Financial accounting, also called external accounting or general accounting, is a branch of accounting that deals with the management and control of the monetary operations of a company during a given period.

This accounting makes it possible to keep a history of all the financial transactions (income and expenses) of an organization and to analyze the evolution of its assets through the preparation of annual accounts.

Financial accounting and its characteristics

If we talk about bases and characteristics, in general terms, financial accounting should be:

• Systematic, always governed by the same methodology that facilitates comparison between different accounting periods.
• Chronological, based on specific and concrete periods.
• Constant, controlling uninterruptedly all movements.
• Historical, making it possible to evaluate the economic evolution of the company.
• Understandable, governed by the common language within the financial field.
• Specific, a source of specific, relevant and interesting information.
• Governed by the rules, norms and pre-established accounting principles.
• Truthful, containing reliable information that corresponds to reality.

Financial accounting vs. analytical accounting

Generally, within the accounting of the company we find:

• financial accounting (external),
• analytical or cost accounting (internal).

Although they have different purposes and qualities, both are important and complement each other.

Let us compare some of their particularities:

What is financial accounting for?

The main purpose of financial accounting is to provide concrete, accurate and current information about a company's economy. In more detail, it seeks to know:

• The economic and financial situation in which a company finds itself,
• the operations and cash flows that are part of its financial activity.

💡 In general terms, we understand by " economic situation" the economic gains (revenues) and losses (expenses) of an organization. When we speak of " financial situation", on the other hand, we refer to a company's sources of financing (own funds or borrowed funds).

At the same time, the idea is that all this information should be useful:

• Internally: to facilitate decision-making and the planning of new strategies by owners, managers and shareholders.
• Externally: so that potential investors can evaluate and assess the company's situation.

Legal aspects of financial accounting

Financial accounting must comply with various pre-established local or international standards. In this regard, it is interesting to know the existence of:

• GAAP ( Generally Accepted Accounting Principles), the generally accepted accounting principles.
• IFRS ( International Financial Reporting Standards), the International Financial Reporting Standards adopted by the European Union.

In Spain, the General Accounting Plan (PGC), or New General Accounting Plan since its last update, is the document that regulates the accounting activities of companies.

In its latest revision, it was approved:

• Royal Decree 1514/2007, with the aim of adapting to IFRS.
• Royal Decree 1515/2007, specific for SMEs.

💡 The General Accounting Plan was first drafted in 1973 and last revised in 2007.

Who must do it?

According to the Tax Agency:

The Law establishes for entrepreneurs, whatever their form, individual or corporate, the obligation to keep accounts in accordance with the provisions of the Commercial Code or with the provisions of the rules governing them.

For its part, the Commercial Code establishes the following as mandatory:

• The journal book, the one that constantly records the economic operations of a company.
• The inventory book and the annual accounts, which includes the first accounting statement and its evolution recorded periodically in terms of its assets, liabilities and net worth.

Compulsory financial statements in Spain

The annual account of a company is composed of different financial statements. In Spain, businessmen are obliged to prepare

• the Balance Sheet,
• the Income Statement ( or Profit and Loss Statement),
• the Statement of Changes in Equity,
• the Statement of Cash Flows,
• the Annual Report.

The annual accounts must be published in the Mercantile Registry, which is publicly accessible.

When to do it?

It is advisable to prepare the financial statements on a quarterly basis, although there are also those who prepare them annually or according to the company's own needs.

What is financial accounting used for?

As we have seen above, the purpose of financial accounting is to compile all the economic movements of a company in order to subsequently prepare its annual accounts and send them to different stakeholders.

Its importance can be differentiated according to the different audiences concerned.

Financial accounting for managers and owners

Financial accounting is a very powerful weapon for owners, managers and shareholders as it serves, among other things, to:

• know the company' s situation and evolution in financial and economic aspects,
• be aware of the financial health of the company,
• to make firm and safe decisions based on proven evidence.

Financial accounting for the Public Administration

For the Public Administration (Treasury and Social Security), the financial statement provided by this type of accounting allows to verify the good economic activity of an entity, as well as to calculate the taxes that the company will have to face according to its characteristics.

Financial accounting for investors and creditors

The importance of financial accounting for third parties is based on the information it provides about the company. Such information, clear and transparent, helps to know the economic solvency of a company and to assess whether it is appropriate to invest in it. If you want to trade, you will want to analyze first.

Therefore, beyond its mandatory nature required by law, doing your company's financial accounting should be part of your business strategy as it is a powerful tool for internal use.

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How to carry out your company's financial accounting?

Whatever the size of your company, financial management is an activity that requires a lot of time and effort. Moreover, it can often be unattractive to do it.

That's why there are several allies that automate tasks and allow you to work more efficiently: accounting software.

Getting one, either on-premise or hosted in the cloud, will enable you to:

• work your accounting processes more easily and efficiently,
• avoid common mistakes,
• keep your information up to date without too much effort,
• automate some processes,
• access to the history of operations quickly.

And these are just some of the advantages! Tempting, isn't it?