There is a specific period of year when we become aware of finance and accounting and our assets and liabilities are at the forefront of our mind: tax time.

An analysis of cash flow (among other details) in and out of our account, or that of a big business, will become the focus of much time and analysis to understand how this flow can help us balance a financial statement and offset the expenses we've had throughout the year.

To make sure a company is really staying on top of its cash flow, likewise for a large institution like a university or government, a team of accountants will spend their time every three months or so making sure that the details about quarterly cost analysis and balance of company assets is undertaken so that ultimate transparency can be achieved come tax time.

This is more to appease stock and shareholders in a business, not to act as a regular tax return per se. It's the work of financial and managerial accountants year-round to take care of this because they deal with the numbers, tax principles, national and international standards, and auditing of accounts and assets on a daily basis in order to provide clear reporting and statements to help the decision making process for a company.

Income statements, cost flow analysis, risk and liabilities, balance reporting, stock taking of assets, and several other details all fall within the remit of financial accountants.

These accounting professionals are the ones who monitor transactions, assets, and holding to provide statements and reporting on the current financial, management, expenses, and equity program of an Australian or international business.

The authors of this article at Superprof are aware that some of the terms we've referred to might be making your head spin, so we will be giving you some clear details for you to study about the education, work, standards, and specific responsibilities of financial accountants.

Accountants make life easier
A financial accountant has to keep the general public in mind in their work. | Source: Pexels - Mikhail Nilov

The material that such professional would use when preparing statements on assets and accounts would now use a spread sheet rather than paper reports, but the principles of accounting have essentially remained the same since the dawn of time.

If you're currently in the period of your life where university specialisation choice time is near, then making a decision about a subject area such as management or financial accounting is something to consider seriously, as it will affect the course of study of your program.

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Australian GAAP

Anyone who has studied even a minimum amount of an accounting course at university will have heard of the Generally Accepted Accounting Principles informally called GAAP.

The current standards subject all businesses to the same kind of auditing and reporting, account by account over a given period to ensure that they all follow the same program and remain transparent and clear should an external body also need to study them.

The GAAP standards typically set the bar for all managerial and accounting standards, and include how text on a spread sheet should be presented, as well as how to carry out education on these standards in Australian and international contexts.

Nevertheless, these are not the be all and end all of standards in Australia or the international market.

The Australian Accounting Standards Board (AASB) is an incredibly important body to know, especially for students for whom the current period of university study focuses on learning about regulation and monitoring. Many a text at university will in fact focus on this, as it applies to fields as diverse as marketing and auditing to ISBN (International Standard Book Numbers for monitoring assets).

Let's take a look at their purpose and methodology:

The AASB is the most current body whose program deals with account reporting and equity in cash flow and expenses across various transactions for any business who operates in an Australian context.

Financial accounting deals with people AND numbers
Financial accounting does actually require a lot of people facing work. | Source: Pexels - Rodnae Productions

They set the guiding principles for standards in accounting, and are authors on many a text that imposes equity and transparency standards on all companies who declare income in Australia, thus making them the subject of tax under Australian law. 

Beyond the Australian standpoint, they also seek to study and contribute to international standards and education around management of assets, tax systems, marketing regulations, and any such text on the subject in the international arena, such as ISBN which applies to almost every country (management of assets via barcodes, simply put).

Are management accountants held to the same rules as financial accountants?

A Brief Breakdown of Financial Accounting

These standards typically impose one of either, or a combination of two methods for achieving these means.

The first is known as the accrual method which involves taking stock of accounts case by case, even if this involves projecting actual revenue.

Take for example if someone buys on credit - this is taken as the actual payment given the assumption that the repayments will equal direct revenue over time to the company. Investment would take a serious hit if actual money in a bank account were considered for large companies since the current amount on hand would be less. This is why calculations are done on credit.

After this, accounting expenses - general overheads, company investments, material cost tallies etc - are considered in the accounting cycle which is the overall process of recording events. This is simply to give a clearer picture of the financial health of a company.

Over the course of the last century, this has become common practice even though it's more convoluted in its current form that previous cash handling.

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When it's tax time, call your accountant!
Tax time is when everyone calls their accountant. | Source: Pexels - Nataliya Vaitkevich

Cash accounting is the second method where the cash actually changes hands.

Take the example of buying $5000 worth of furniture from an independent retailer with the promise to pay the remaining balance within a month. Even though their inventory is diminished, they won't see a profit until next month.

The issue here is that the stock taken does not account for the actual sale given that the cash hasn't fully changed hands yet, which can sometimes affect the small business's financial profile.

To further complicate things, if this were done on the 30th of June, the payment could not help offset the company's tax for the previous financial year, so even though it may potentially be harmful, the clarity and simplicity around it means that many small business owners opt for this, while larger companies are required by GAAP to use the accrual accounting method.

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The Fundamental Role of a Financial Accountant

All financial transactions will be done under the watchful eye of such a professional in order for them to observe trends and variances.

They will also use their expert knowledge of tax systems and accounting processes to provide suggestions for future growth and write statements demonstrating financial analysis to show to shareholders why and how ambitious their future projects may be based on forecasting.

The financial accounting team will also gather, summarise, analyse, and scrutinise data to present to shareholders while taking into account quarterly and annual statements that will show how gross income will be affected once tax is applied and expenses are accounted for.

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Required Knowledge and Skills for Financial Accounting

Accounting is about more than just having a head for numbers. Accounting principles and basics are the cornerstone of any such employment.

You also need to be able to apply acute research and analysis skills when auditing transactions and placing them in the grander scheme of an entire company or sector in the Australian or international market, which includes marketing tactics and stock taking of assets.

Aussie money is worth a lot
Pinch your pennies, and do it ethically with a transparent financial accountant. | Source: Pexels - David Peterson

Statistical analysis is also at the forefront of their focus, since crunching the numbers is how they find patterns and can make informed recommendations and decisions that will affect businesses, including mergers, takeovers, and down-sizing.

Financial Accounting in Sum

  • It is the process of recording, summarising and reporting transactions resulting from business operations within a specific period of time, either monthly, quarterly, or annually.

  • It can be done via accrual accounting or cash accounting, of which the former takes earnings into account even whilst on credit, and the latter does not

  • Reporting is done with a balance sheet, cash flow statement, or financial statement

  • Statements reflect a company's operating performance at the time of reporting, regardless of the AASB approved styles chosen

It is clear that financial accountants have their fingers on the pulse of individual businesses as well as a larger economy.

They are essential for all business operations although may be less visible that other executive decision making bodies.

Make sure, if you're wanting to break into any sector in the Australian or international market that you consult a financial consultant!

Now get into learning about the differences that define managerial and financial accountants.

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