The focus of financial accounting is on summarizing and reporting a business's financial position to entities outside the business with a vested interest, such as stockholders, creditors, government agencies and suppliers. The counterpoint to financial accounting is managerial accounting, which provides information to those inside the business and influences decisions by management.
Unlike managerial accounting, financial accounting is required by law for all registered companies, including corporations, limited liability companies (LLCs) and partnerships. Standards to which companies must adhere when reporting their financial positions include generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS).
GAAP comprises a comprehensive list of financial reporting standards including laws set forth by various policy boards and traditional standards that, while not coded into any specific law, represent procedures currently accepted within the financial accounting community. The existence of GAAP helps to ensure consistency and transparency in the financial reporting of thousands of companies across dozens of industries. The goal is to enable investors, regulators and creditors to compare two or more companies side by side using like data sets that are easily procured.
The goal of IFRS is to promote consistency in financial reporting standards from country to country as barriers to trade breakdown and globalization plays an ever-larger role in nations' economies.
The three primary documents associated with financial accounting are the income statement, balance sheet and statement of cash flows. The income statement reports a company's revenues and expenses during a given period, usually one year. A company's revenues are known as its top line; total revenues appear on top of the income statement, after which expenses are subtracted to arrive at net income. Net income is known as a company's bottom line; it is widely regarded as one of the most important numbers in financial accounting.
While the income statement shows a company's profits or losses over a period of time, the balance sheet provides a snapshot of its financial picture at a single moment in time. The balance sheet is divided into three sections: total assets, total liabilities and ownership equity. Assets are listed on one side, with liabilities and equity on the other. As its name suggests, the balance sheet must balance, with the sum of the company's liabilities and ownership equity equaling its total assets. Put another way, a company's ownership equity is its assets left over after liabilities are subtracted.
The third key document in financial accounting is the statement of cash flows. Similar to the income statement, the cash flow statement tracks a company's financial position over a period of time rather than at a specific time. This statement shows how cash flows in and out of a business through three types of activities: operating activities, investing activities and financing activities. Outsiders use a company's statement of cash flows to gauge its solvency and its ability to pay bills on time.
FAQs
Financial accounting focuses on the analysis and external reporting of businesses' financial information. Financial accountants use accounting concepts and principles to analyze financial statements, evaluate businesses' financial health, and externally report findings to potential investors or government agencies.
What do financial accounting reports concentrate on? ›
The focus of financial accounting is on summarizing and reporting a business's financial position to entities outside the business with a vested interest, such as stockholders, creditors, government agencies and suppliers.
What is financial accounting answers? ›
What Is Financial Accounting? Financial accounting is a specific branch of accounting involving a process of recording, summarizing, and reporting the myriad of transactions resulting from business operations over a period of time.
What is the main objective of financial accounting answer? ›
Financial accounting's primary goal is to generate financial reports that convey information about a company's performance to external parties such as investors, creditors and more. How do you keep your accounting records accurate? There are various methods for keeping accurate records.
What is the primary focus of financial reporting? ›
One, the primary objective of financial reporting is to provide useful information so that investors, creditors and other users can make rational decisions.
What are the four major parts of financial accounting? ›
Typically, you'll need all four: the income statement, the balance sheet, the statement of cash flow, and the statement of owner equity. By preparing these four accounting financial statements, you will be able to see how well your company's finances are doing or find areas that need improvement.
Why is financial accounting so important? ›
Financial accounting is a way for businesses to keep track of their operations, but also to provide a snapshot of their financial health. By providing data through a variety of statements including the balance sheet and income statement, a company can give investors and lenders more power in their decision-making.
Why is it important to study financial accounting? ›
Studying accounting develops your critical thinking and problem-solving skills, which are vital in not only your career, but also your everyday life. They allow you to identify and solve financial issues and develop solutions to prevent them happening again in the future.
Is financial accounting hard? ›
Generally speaking, accounting is overall a difficult major, but financial accounting is a very straightforward class in the beginning. Financial accounting class teaches you the fundamentals of accounting.
What are the golden rules of accounting? ›
What are the Golden Rules of Accounting? 1) Debit what comes in - credit what goes out. 2) Credit the giver and Debit the Receiver. 3) Credit all income and debit all expenses.
What Is Accounting? Accounting is the process of recording financial transactions pertaining to a business. The accounting process includes summarizing, analyzing, and reporting these transactions to oversight agencies, regulators, and tax collection entities.
What is accounting in your own words? ›
Accounting is the process of recording, classifying and summarizing financial transactions. It provides a clear picture of the financial health of your organization and its performance, which can serve as a catalyst for resource management and strategic growth.
What is contained in a financial report? ›
The three main types of financial statements are the balance sheet, the income statement, and the cash flow statement. These three statements together show the assets and liabilities of a business, its revenues, and costs, as well as its cash flows from operating, investing, and financing activities.
What does the financial report include? ›
The four key types of financial statements found within a financial report include income statements, balance sheets, a statement of retained earnings, and cash flow statements.
