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Financial Accounting Demystified

The project manager, needs a grasp of financial accounting so that financial reports and the project business case are consistent with organizational reporting rules and guidelines.

There are two main branches within finance, which you may already have heard of:

  • Financial Accounting
  • Management accounting

Both financial and management accounting rely on accurate and timely data to work effectively.

But they have different objectives and a different emphasis. The accurate recording of transactions, preparation of financial reports that are required by statutory and regulatory authorities, fall within Financial Accounting.

Whereas budgeting, costing and business case is for within management accounting.

The following graphics compares on contrasts these main differences:

Financial Accounting Demystified

Clarifying financial terminology

Accruals
Revenue and expenses needs to match in terms of timing, so consider the following as a simple example of what this means:

A DIY shop buys 100 cans of paint for $2.00 each
In one week, 50 of the cans are sold for $5.00 each

The income for the week is $250 (50 times $5.00), And the costs associated with the week’s sales are $100 (50 times $2.00)

The shop would only show these income and cost centers in its accounts for that accounting periods even though it bought in more stock than it sold. The costs of purchase of remaining cans of paint would not be shown in the accounts Until they were sold.

Another example could be where there is a single payment made For Internet Rental butts the payment covers three months’ rent. The rental amount would be spread across the three months.

Consistency

Definitions and practices Should be consistent within an organization over time so that trend comparisons can be undertaken periods where there are charges, then these need to be communicated in the form of accounts the prepared.

Prudence

Losses, for example that debt risk, should be recognized in the accounts as soon as they are identified. Gains should be reflected only when they are definite, that is once the customer is invoiced.

This is one of the main reasons for tensions between finance and the sales teams!

Separability

I need to explain how the figures are arrived at. If we have sales of $100,000 and costs of $101,000, It would not be sufficient to say we made a profit of $1000, We need to know about how all this was arrived at. The accounting rules for a country will define how separable the elements within the financial accounts and needs to be.

Going concern

This principle means that accounts are prepared on the basis that the organization is going to continue to exist and trade for the for sea of all future. Its assets are shown at the value they provide to ongoing operations, not at the level they might reach on the open market.

Clarifying financial jargon

Asset

Something of value that is owned by the business, or to which the business has a right. These are divided into different categories, principally fixed and current assets.

Liability

Something that is owed, an obligation

Expenses

Money paid out by the organization

Revenue, turnover or income

Money earned by the organization

Accounts Payable (USA) or Purchase Ledger (UK)

Record of whom are the organization has bought from and the amount going (payable) to them.

Accounts Receivable (USA) or Sales Ledger (UK)

Record of whom are the organization that has sold two and the amount they go to us – in other words, what we expect to receive

Profit and loss

The summarised record of all the revenues and costs of an organization Over a stated. Of time. A profit is achieved when the revenues exceed the costs.

Balance sheet

A snapshot of what the organization owns and what the organisation are those at a single point in time

Cost center

A team, business area or department that only incurs cost

Profit center

A team, business area or department that incurs cost and generates revenue

Financial Accounting

Has a focus of external reporting of historical information to fixed timescales in line with statutory or regulatory requirements, and includes the following aspects

  • The recording of accounting transactions
  • The major financial reporting statements, balance sheet and profit and loss
  • The analysis of external financial reports
  • The differences between profits and cash

If you want to know more about financial information, then click here to learn about The Balanced Scorecard

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