The Different Aspects of Financial Accounting

Financial management is a relatively narrow term encompassing things about the science, development, and management of funds and investments. It includes all those areas which deal with financial decisions like managing risk, pricing and scheduling, hedging, and other aspects. It also includes a lot of government activities like managing tax, collecting income taxes, implementing policies to stabilize the financial system, and implementing and monitoring programs to deal with the prevention, reduction, and control of financial risks. Financial management encompasses all these activities and there are many aspects of it.

The term “finance” was first used by Luca Pacioli in 1801, but its etymology points to a Latin phrase – fructu. This means “doing of something through an act of will.” It is thought to be related to “manner” through which something is done. Thus, the term was applied to the science of making choices through perception and evaluation. Later, it was generalized to include the whole field of human action, including mental aspects such as perception and appraisal, application, decision-making process, motivation, determination, and the adoption of attitudes, behaviors, and expectations. Hence, the field became known as financial management.

Financial management involves three main aspects. These are savings, borrowing, and investment. The four aspects are interrelated and depend on one and sometimes other aspect. The savings aspect of the discipline is concerned with maximizing available resources; applying optimum leverage; and minimizing the costs of borrowing and investing.

The second aspect of financial management is investing. The goal of the investor is to maximize his/her return on investment. Broadly, this means pursuing projects that yield short-term gains, either through revenue or savings. One of the three main fields of modern social finance is called microfinance, which mainly deals with small-scale loans, credit facilities, and other forms of financial transactions.

A third aspect of financial planning is financing. This involves using banks and/or other financial institutions to provide credit facilities to businesses and individuals. This financing may be in the form of bank loans, guarantees, and certificates. In addition, many banks offer their customers a service that enables them to invest in their own accounts. Such an investment strategy may be used to ensure long-term sustainability of a company’s activities or to generate additional profits for a particular business undertaking.

A fourth aspect of financial accounting is managerial accounting. Managerial accounting concerns itself with valuing the whole enterprise through cost accounting, income accounting, and cash flow analysis. It also involves preparing financial statements, providing accounting advice, implementing and interpreting financial statements, and communicating risks and uncertainties to the other participants in the organization. A major challenge facing managerial accounting is ensuring that all of the information provided by its different parts is comparable. For instance, companies’ use of assets, liabilities, revenues, and spending should be similar so as to facilitate effective and efficient financial accounting.