Financial Accounting Explained | Tally Solutions

Financial Accounting

  • 1. What is Financial Accounting?
  • 2. What are financial statements?
  • 3. Where do we find these financial statements in Tally.ERP 9 and what are the shortcut keys to assess them?
  • 4. What purpose does financial accounting serve?
  • 5. Tally Accounting = Financial accounting

1. What is Financial Accounting?

Statement of final accounts or financial accounting is the process of preparing financial statements that companies’ use to show their financial performance and position to people outside the company, Including investors, creditors, suppliers, and customers.

2. What are Financial Statements?

Preparers of financial statements generally put together a quarterly and annual financial statement, which they make available to shareholders and the investing public. There are four basic financial statements used in the accounting world to show a company’s financial performance:

Financial Statements Explanation
Income Statement or Profit and Loss Statement -
  • Period Covered : Generally covers a specific period of time (such as a quarter or year)
  • Equation : Revenues - Expenses = Net Income.
  • Accounting principles :

In accordance with the Generally Accepted Accounting Principals (GAAP), revenue is always recorded in the period of the sale of the goods and services, which may not be the same period when cash is actually received.

Balance Sheet -
  • Period Covered : It is a statement of assets and liabilities at the end of an accounting period.
  • Equation : Assets = Liabilities + Stockholders’ Equity / Owners Equity
  • Accounting Principles :
    • Cost Principle : The cost principle requires that the asset be shown in the asset account at its original cost rather than at the recently appraised market value.
    • Matching Principle : It requires expenses to be matched either with revenues or with the time period when they are used. The cost of the unused supplies/Raw material Inputs remains on the balance sheet in the asset account Supplies/ Input Raw material.
    • Going Concern Assumption : A classic example to relate here is Prepaid insurance. It represents the cost of insurance that has not yet expired. On the expiry of insurance, the expired cost is moved to Insurance Expense on the income statement as required by the matching principle.

      The cost of the insurance that has not yet expired remains on balance sheet (is "deferred" to the balance sheet) in the asset account Prepaid Insurance.

      This is followed following the accounting principle of going concern entity which implies that the business entity will continue its operations in the future and will not liquidate or be forced to discontinue operations due to any reason.

      A entity is a going concern if no evidence is available to believe that it will or will have to cease its operations in foreseeable future.

    • Money measurement concept : To record only those assets that can be expressed into monetary terms.
Cash flow statements (CFS) -
  • Period Covered : Generally covers a specific period of time (such as a quarter or year or even monthly statements)
  • Equation : CFS = Net cash flows from operating activities (+) investing activities (+) financing activities.
  • Accounting Principles :

    International Accounting Standard (IAS 7) Statement of Cash Flows requires an entity to present a statement of cash flows as an integral part of its primary financial statements.

    Cash flows are drafted and presented into operating activities (either using the 'direct' or 'indirect' method), investing activities or financing activities, with the latter two categories generally presented on a gross basis.

Statement of retained earnings -
  • Period : Generally covers a specific period of time imputed by users of information
  • Equation : Retained earnings (RE) = Beginning Period RE (+) Net Income/ Loss (–) Cash Dividends (–) Stock Dividends.

    Retained Earnings (RE) are the portion of a business’s profits that are not distributed as dividends to shareholders but instead are reserved for reinvestment back into the business.

    These represents a useful link between the income statement and the balance sheet, as they are recorded under shareholders’ equity which connects the two statements.

3. Where Do We Find These Financial Statements in Tally.ERP 9 and What are the Shortcut Keys to Assess them?

Financial Statements Where do we find them Shortcut key
Income and Expenditure or Profit and Loss Account -

Where do we find them ? On gateway of Tally screen

Income and Expenditure Account :

Income & Expenditure Statement is suitable for organizations which do not engage in trading of goods or services.

We can toggle between Income and Expenditure Statement and Profit & Loss A/c by pressing F 11 on the keyboard, and setting the option Use Income and Expenses A/c instead of Profit and Loss A/c? to Yes/No as, as required.

For Profit and Loss Account = Letter “P” on the keyboard

For Income and expenditure Account = Letter “N” on the keyboard

Balance sheet - Where to find ? On the gateway of Tally screen. Letter “B” on the keyboard
Cash flow statements - Where to find ? Gateway of Tally > Display > Cash/Funds Flow > Cash Flow .

4. What Purpose Does Financial Accounting Serve?

The main objectives of financial accounting could be

  • To ascertain the operating results of the enterprise
  • To exhibit the financial position of the business; and
  • To thrust control over the operation as well as the resources of the business.

Apart from the above there are some objectives of financial accounting which could be derived from the above and they are

Systematic Record maintenance

Financial Accounting is to report the results of most business events. Hence, it becomes important to keep a systematic record of these events. This function embraces recording transactions in journal and subsidiary books like cashbook, sales book etc., posting them to ledger accounts and ultimately preparing the financial statements [final accounts].

Communicating the Results

The other main function of financial accounting is to communicate the financial facts of the enterprise to the various interested parties like owners, investors, creditors, employees, government, and research scholars, etc.
The cause of this function is to enable these parties to have better understanding of the business and take sound and realistic economic decisions.

Meeting the Legal Requirements

Financial accounting aims at fulfilling the legal requirements, especially of the tax authorities and regulators of the business by discharging this function in accordance with certain fundamental truths and uniform enforcement of generally accepted accounting principles.

5. Tally Accounting = Financial Accounting

Tally Accounting is a software used for financial accounting purposes. It is provided by Tally Solutions and is a standard business accounting software. Tally.ERP 9 is a very robust ERP product and is a complete business management solution.

All the accounting activities, such as financial records of a business, the generation of statements concerning the liabilities and assets of a business, all of them are easily managed with Tally solution.

The name of the business solution, Tally, is inspired by the meaning of the word "tally", which is to count, to keep the record.

Accounting is the activity or the system of keeping records of transactions of a business or any other organizations in monetary terms. It records the money or value for money received by or given to different persons or entities from time to time. It enables an organization to ascertain facts such as money owed to or by different entities, the assets and liabilities of the organization in different forms and the profit or loss made by it during specified periods.

Tally is a trade name of accounting software maintaining accounts, and for performing additional accounting and other analytical operations helpful in management of an organization.

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