Financial accounting

A company’s financial accounts classify, quantify, and record its transactions. They are extremely useful for people outside the business, such as creditors and potential investors, as well as those currently involved with making investment decisions. For this reason, the accounts should be concise and clearly present the timing and certainty of future cash flows, so that people looking at the company can decide whether or not to invest in, lend money to, or do business with it.

$74 billion
the total value lost by shareholders in the 2001 Enron accounting scandal

Key elements

The profit-and-loss account, balance sheet, and cashflow statements are the most important financial statements in an annual review, supplemented by the report’s notes. To understand these statements, a knowledge of accounting principles, depreciation, amortization, and depletion is vital. Accountants also need to understand the legal requirements that the statements must satisfy and how environmental laws can affect a business and its accounts.

Accounting standards

Generally accepted principles standardize practice worldwide to ensure accuracy and prevent fraud.

• ❯ International standards simplify account reporting.
• ❯ Companies must meet environmental accounting rules and regulations.

Profit-and-loss statement

Shows how much money a company is making and is especially useful for potential investors and stakeholders.

❯ Outlines revenues and gains minus expenses and losses or operating costs.
❯ Informs a company if a profit warning is needed.

Balance sheet

Gives a snapshot of how much a business is worth at a certain time and is a good indication of its long-term health.

❯ Balances company’s assets against its equity and liabilities.
❯ Lists different types of assets, including tangible fixed assets and current assets.

Cash-flow statement

Reveals a company’s liquidity by tracking the flow of cash— money or short-term investments—in and out of the company.

❯ Shows if a company can sustain itself, grow, and pay debts.
❯ Details cash flow from operating, investing, and financing activities.

Environmental accounting

Accounts for myriad environmental rules and regulations that oblige companies to mitigate the impact.

❯ Showcases green credentials in financial statements.
❯ Reveals compliance with environmental, social, and governance criteria.

Depreciation

Accounts for the decrease in value over time of tangible fixed assets in order to spread the cost of assets over their economic life.

❯ Can be calculated using a number of different methods.
❯ Tangible fixed assets include buildings, plant, and machinery.

Amortization and depletion

Account for the decrease in value over time of a range of intangible assets, loans, and natural resources.

❯ Intangible assets include patents, trademarks, logos and copyright.
❯ Natural resources include minerals and forests.