Financial Accounting Questions and Answers

Financial accounting collects and creates a summary of the economic data in order to prepare the financial reports like balance sheet, an income statement for the company's management, lenders, suppliers, investors, tax authorities and the stakeholders.

The characteristics of Financial accounting are:-

• Monetary Transactions:
• Historical Nature:
• Legal Requirement:
• External Use:
• Disclosure of Financial Status:
• Interim Reports:
• Financial Accounting Process:

Go through this Financial accounting answer very thoroughly

Financial Reporting includes the sharing of the financial information to the different stakeholders about the financial position and financial performance of the company over a definite period of time. The stakeholders are investors, public, debt providers, creditors, governments & also government agencies.

A ledger account is an account which contains a record of the business transactions. It is actually a separate record inside the general ledger which is assigned to a particular asset, equity item, liability, revenue type or an expense type.

Examples of ledger accounts are:

• Cash
• Accounts receivable
• Inventory
• Fixed assets
• Accounts payable
• Salaries and wages
• Office expenses
• Income tax expense

There are four types of Financial reporting:-

• Income statement:- Income statement for the entire reporting period unveils the financial performance of a firm. It starts with the sales and then it deducts all the expenses which were incurred during the period to reach a net profit or net loss.
• Balance sheet: - Balance Sheet displays the financial situation of a business as of the report date (thus it covers a precise point in time). The info is combined into the general classifications of assets, equity & liabilities.
• Cash flow statement:- Cash flow statement report unveils the cash inflows and cash outflows experienced by a company during the reporting period. These cash flows are actually broken down into three classifications -operating activities, financing activities & investing activities.
• Changes in equity statement: - This report documents all the changes in equity during the period of reporting. These variations include the issuance or the purchase of shares, dividends issued and the profits or losses.

There are basically two systems of Accounting:

• Cash System of Accounting:- Cash System of Accounting only records the cash receipts and the payments. This system actually assumes that there are no credit transactions. In this system of accounting, expenditures are considered only when they are actually paid, and incomes are considered only when they are genuinely received.
• Mercantile or an Accrual System of Accounting:- In Accrual System of Accounting, expenditures and revenues are treated during that period to which they actually relate. This system of accounting is regarded to be ideal, but it can result in unrealized profits.

Capitalization in an accounting context means the price to purchase an asset which is actually included in the price of the asset whereas in the financial context it is the price which is required to buy an asset which comprises of price of a specific asset, and it also includes the company’s retained earnings with the stock debt and even the long term debt. Capitalization is of two kinds which are Overcapitalization and Undercapitalization .

Point to be noted:- Go through this Q&A very thoroughly as this is one of the essential Financial accounting questions.

Adjusting entries are compulsory at the end of each financial period to align the incomes and expenses. Adjusting entries usually occur before the release of the financial statements.

Adjusting entries are of two types:-

• Accruals: Revenues earned or expenses acquired that have not been earlier recorded
• Deferrals: Receipts of assets or the payments of cash well in advance of revenue or expense recognition