Financial Accounting Meaning, Principles, and Why It Matters

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. These transactions are summarized in the preparation of financial statements—including the balance sheet, income statement, and cash flow statement—that record a company’s operating performance over a specified period.

Work opportunities for a financial accountant can be found in both the public and private sectors. A financial accountant’s duties may differ from those of a self-employed accountant who works for many clients preparing their accounts, tax returns, and possibly auditing other companies.

• Financial accounting is the framework that dictates the rules, processes, and standards for financial recordkeeping.
• Nonprofits, corporations, and small businesses use financial accountants to prepare their books and records and generate their financial reports.
• Financial reporting occurs through the use of financial statements, such as the balance sheet, income statement, statement of cash flow, and statement of changes in shareholder equity.
• Financial accounting differs from managerial accounting, as financial reporting is for reporting to external parties, while managerial accounting is for internal strategic planning.
• Financial accounting may be performed under the accrual method (recording expenses for items that have not yet been paid) or the cash method (only cash transactions are recorded).How Financial Accounting Works

Financial accounting utilizes a series of established principles. The accounting principles used depend on the business's regulatory and reporting requirements. Companies and organizations often have an accounting manual that details the pertinent accounting rules.

U.S. public companies are required to perform financial accounting in accordance with generally accepted accounting principles (GAAP) . Their purpose is to provide consistent information to investors, creditors, regulators, and tax authorities.