Financial accounting

Definition

Financial accounting involves the process of recording, summarizing, and reporting a company's financial transactions through financial statements. It provides information that is primarily useful for external users such as investors, creditors, and regulatory agencies.

5 Must Know Facts For Your Next Test

1. Financial accounting focuses on historical data and complies with standardized principles like GAAP or IFRS.
2. The primary financial statements are the balance sheet, income statement, statement of cash flows, and statement of changes in equity.
3. Financial accounting is periodically reported, typically on an annual or quarterly basis.
4. It emphasizes accuracy and objectivity to ensure that financial information is reliable and comparable.
5. Unlike managerial accounting, which is used internally, financial accounting targets external stakeholders.

Review Questions

• What are the primary financial statements used in financial accounting?
• How does financial accounting differ from managerial accounting in terms of its audience?
• Why is it important for financial accounting to adhere to standardized principles like GAAP or IFRS?

Related terms

Managerial Accounting: Managerial accounting focuses on providing internal management with the information needed to make informed business decisions.

GAAP: Generally Accepted Accounting Principles (GAAP) are a set of rules and standards used by accountants in the U.S. to prepare and present financial statements.

IFRS: International Financial Reporting Standards (IFRS) are a set of global accounting standards developed by the International Accounting Standards Board (IASB) for preparing public company financial statements.