Financial accounting is the process by which an organization's transactions are collected, measured, recorded and finally reported to the outside world. This process is designed to accurately reflect business activity, help companies meet legal, fiscal and statutory requirements, present financial accounts to business owners, allow for improved analysis, and facilitate efficient resource allocation.
The Final Accounts
In a practical sense, the main objective of financial accounting is to accurately prepare an organization's final accounts for a specific period, otherwise known as financial statements. The three primary financial accounts are the income statement, the balance sheet and the statement of cash flows.
Firms initially began preparing such accounts to provide important information to their shareholders and loan creditors. Without reliable information, it is much riskier for lenders to grant capital to a business. In turn, investors and shareholders compare final accounts among different companies to look for higher-quality prospects.
The Objectives of Financial Statements
In 1973, the American Institute of Certified Public Accountants, or AICPA, released a study entitled "The Objectives of Financial Statements." The study concluded that financial statements were primarily useful for helping multiple parties make economic decisions.
The AICPA further described financial accounting as the proper method for delivering the final accounts. The final accounts were primarily intended for those with only limited access to information about a given business enterprise.
Financial Reporting Standards
In the United States, financial reporting standards are set forth by the Financial Accounting Standards Board, or FASB. The FASB is contracted out by the Securities and Exchange Commission, or SEC, to control the approved methods and applications of financial accounting.
Financial accounting is normally performed by those individuals who have studied the methods, concepts, history and laws related to its practice. In the U.S., these individuals are referred to as certified public accountants, or CPAs.