is financial accounting hard

is financial accounting hard

Demystifying Financial Accounting: A Comprehensive Guide for Students

1. Introduction to Financial Accounting

I. Why Should You Study Financial Accounting? Financial accounting is the key tool for communicating financial information about a business to a wide variety of different users, including owners/investors (or potential owners/investors), and especially non-owner external parties who have no way of obtaining such knowledge of the business without access to this useful information. We will explore the different needs and perspectives of the many different potential users of this vital information.

Chapter Summary: This comprehensive guidebook serves as an introduction to the reader or user of financial accounting. This introduction explains what financial accounting is, the information that it provides, and how it does so. The historical context of accounting is discussed, providing an understanding of the strategies that businesses use to establish and operate as business entities. There is a clear explanation of how experts define successful accounting practices that contribute to business success.

2. Key Concepts and Principles in Financial Accounting

To begin with, it is important to appreciate the nature of the activities that businesses undertake. Businesses are organizations that make and sell products, provide services, or engage in construction or similar activities. Some businesses operate using a simple organizational structure that involves only one person, for example, a partner in a professional practice or a sole proprietor in a retail shop. The more common form of organization, by far, is the corporation, which is a legal entity recognized as being separate from its owners. These are the business forms that we focus on in our approach to accounting, that is, sole proprietorships, partnerships, and limited companies, otherwise known as corporations. Each form of organization has specific regulatory and tax reporting obligations. However, businesses of different types can be evaluated and compared using the same basic accounting and financial concepts and principles.

In providing useful financial information, the financial accounting system is based on a number of key accounting concepts and principles. The purpose of this chapter is to outline the concepts and principles relating to financial accounting. It will be evident from this chapter that the preparation of financial statements is not just a mechanical process but also involves much judgment and estimation. Moreover, the applications of many accounting concepts and principles require detailed knowledge of the operations and transactions of a business. Combined with the specific meaning given to some accounting terms, this chapter lays the groundwork for the more detailed examination of the accounting methods and procedures for recording and reporting business transactions.

3. Financial Statements: Understanding and Analyzing

This chapter reveals and discusses the importance of financial statements, the balance sheet and the income statement. Both statements and the authors’ content may differ slightly among different accounting standards, mainly GAAP (Generally Accepted Accounting Principles) and IAS (International Accounting Standards). Since this is a student handbook, the author prefers not to complicate the analysis of financial statements and thus use the simplified content models. However, in some sections of this handbook helpful updates will be included so to transform the newly referred simplified models into their fully detailed versions, complying with both the GAAP and IAS.

This chapter discusses financial statements in accounting, reports upon the structure of the balance sheet, and the designing of an income statement. Profitability and the liquidity of an institution can be perceived by analyzing the data included in both balance sheets and income statements. Strategies and causes that might be behind any business’s success or failure can be recognized by analyzing financial statements.

4. Common Challenges and How to Overcome Them

Chapter 1 introduced you to financial accounting, a critical part of the wider accounting discipline. Chapter 2 sought to bridge the gap between students’ personal experiences and financial accounting. It also introduced key accounting terms, concepts, and financial statements. By understanding and applying the rules of accounting, you will develop an appreciation of financial transactions in different business contexts. You will also develop the analytical and decision skills sought out by employers and business managers. The latter chapters will equip you with skills to prepare and analyze financial statements. Understanding the mechanics of financial accounting can be daunting and requires patience and time. As common with most college students, financial accounting can be perceived as challenging, resulting in students being less engaged in their class work. This reluctance to engage can be difficult to turn around, and in the end, students come away from the subject with less knowledge than they might have gained and few if any convictions as to the discipline’s practical usefulness.

This chapter provides a comprehensive list of common challenges faced by students when they study financial accounting. As the chapter suggests, most of these challenges stem from a heavy dependency on theory, combined with limited exposure to real-world use cases. The authors also offer some sound advice on what students can do to fully benefit from the contents of this book.

5. Practical Applications and Case Studies

Due to declining enrollment and the long-term reduction in government subsidies, the commercial studies faculty, of which the Department of Accountancy was a part, was beginning to offer locally accredited and self-accredited and vocationally oriented programs to broaden the interest and attraction of the relevant courses in order to attract students. With the time granted by an enlightening sabbatical, I took the opportunity to rewrite material with those students in view. Instead of teaching the aging casebook on U.S. firms, I could teach a practical application using mainly annual reports of local firms. In most cases, my students would have a vernacular-language education and wide colloquial language experience, but signally, they had seen English as a likely future employment hurdle, because all accounting qualifications then available in Hong Kong had an English-language syllabus. They needed a practical approach.

Following the mid-1970s enthusiasm for structured case-based teaching in management subjects, this practical application of financial accounting was aimed at teaching students to comprehend and interpret financial statements. For several years, this and other casebooks and encyclopedias, comprising mostly annual reports of large U.S. firms, had been used widely in courses for BBA students and in MBA programs, which were numerous at the time. For BBA students, however, these casebooks were unsuitable. Their analyses tended to be narrowly focused because of the intricate nature of the cases and extensive information furnished in the cases relative to the financial statements. These sources were less than ideal for the kind of student I would be teaching in the Hong Kong Polytechnic in the late 1980s. Most of my students would have been local throughout the Cantonese-medium secondary education then offered by prominent secondary schools, and many would be first-choice students who were not able to obtain a place in the university.

“If we do a good job, we will make money.”