Loading the player...

What is 'Financial Accounting'

Financial accounting is the 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 the company's operating performance over a specified period.

BREAKING DOWN 'Financial Accounting'

Financial accounting utilizes a series of established accounting principles. The selection of accounting principles to use during the course of financial accounting depends on the regulatory and reporting requirements the business faces. For U.S. public companies, businesses are required to perform financial accounting in accordance with Generally Accepted Accounting Principles (GAAP). International public companies also frequently report financial statements in accordance to International Financial Reporting Standards. The establishment of these accounting principles is to provide consistent information to investors, creditors, regulators and tax authorities.

Accrual Method vs. Cash Method

Financial accounting may be performed using either the accrual method, cash method or a combination of the two. Accrual accounting entails recording transactions when the transactions have occurred and the revenue is recognizable. Cash accounting entails recording transactions only upon the exchange of cash. Revenue is only recorded upon the receipt of payment, and expenses are only recorded upon the payment of the obligation.

Financial Accounting Reporting

Financial reporting occurs through the use of financial statements. The financial statements present the five main classifications of financial data: revenues, expenses, assets, liabilities and equity. Revenues and expenses are accounted for and reported on the income statement. Financial accounting results in the determination of net income at the bottom of the income statement. Assets, liabilities and equity accounts are reported on the balance sheet. The balance sheet utilizes financial accounting to report ownership of the company's future economic benefits.

Financial Accounting Vs. Managerial Accounting

The key difference between financial and managerial accounting is that financial accounting aims at providing information to parties outside the organization, whereas managerial accounting information is aimed at helping managers within the organization make decisions. Financial statement preparation using accounting principles is most relevant to regulatory organizations and financial institutions. Because there are numerous accounting rules that do not translate well into business operation management, different accounting rules and procedures are utilized by internal management for internal business analysis.

Accounting Certifications

The most common accounting designation demonstrating an ability to perform financial accounting within the United States is the Certified Public Accountant (CPA) license. Outside of the United States, holders of the Chartered Accountant (CA) license demonstrate the ability as well. The Certified Management Accountant (CMA) designation is more demonstrative of an ability to perform internal management functions than financial accounting.

RELATED TERMS
  1. Account Statement

    An account statement is a periodic summary of account activity ...
  2. Bank Statement

    A bank statement is a record summarizing all transactions in ...
  3. Chart of Accounts

    A chart of accounts is a list of each account a company owns, ...
  4. Cash Accounting

    Cash accounting is an accounting method in which revenues and ...
  5. Accounting Standard

    An accounting standard is a common set of principles, standards ...
  6. Financial Statements

    Financial statements are written records that convey the financial ...
Related Articles
  1. Managing Wealth

    Accounting Research Manager: Career Path & Qualifications

    Discover the basic responsibilities of an accounting research manager, the path this career usually takes and the qualifications needed for this career.
  2. Investing

    Breaking Down The Balance Sheet

    Knowing what the company's financial statements mean will help you to analyze your investments.
  3. Personal Finance

    What Management Accountants Do

    If you like keeping track of a company's income and expenses but also want to hold a position with significant responsibility and authority, management accounting could be the job for you.
  4. Investing

    Understanding Capital And Financial Accounts In The Balance Of Payments

    The current, capital and financial accounts compose a nation's balance of payments, indicating the state of its economy and economic outlook.
  5. Investing

    GAAP

    Learn more about the generally accepted accounting principles, standards and procedures that companies use to compile their financial statements.
  6. Insights

    Navigating Government and Nonprofit Financials

    Examining government & nonprofit financials can help you trace where your dollars are really going.
  7. Small Business

    Best Checking Accounts For Small Businesses

    What you need to know to choose the best checking account for your small business – and where to look.
RELATED FAQS
  1. How does financial accounting differ from managerial accounting?

    Learn about the main differences between financial accounting and managerial accounting, including why one is highly uniform ... Read Answer >>
  2. What are the objectives of financial accounting?

    Learn about the principle objectives of financial accounting, including the furnishing of the financial statements for those ... Read Answer >>
  3. What does financial accounting focus on?

    Learn the main tenets of financial accounting, the guidelines by which it is governed and how outsiders use it to gauge a ... Read Answer >>
  4. How are the three major financial statements related to each other?

    Learn why investors analyze a company's financial statements, and how the income statement, balance sheet and cash flow statement ... Read Answer >>
  5. How do investors and lenders benefit from financial accounting?

    Read about the benefits of financial accounting, including access to information and transparency between companies and their ... Read Answer >>
  6. What kind of financial reporting requirements does GAAP set out?

    Look at some of the major financial reporting requirements set forth by the generally accepted accounting principles and ... Read Answer >>
Hot Definitions
  1. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  2. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  3. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  4. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  5. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
  6. Watchlist

    A watchlist is list of securities being monitored for potential trading or investing opportunities.
Trading Center