What is Financial Accounting?

Financial accounting is the practice of recording and aggregating financial transactions into financial statements. The intent of financial accounting is to distribute a standard set of financial information to outside users of the information, such as creditors, lenders, and investors. It is usually compared to management accounting, which focuses on an operational analysis of a business to explore how it can be made more efficient or profitable. Management accounting reports are only intended for internal use.

The Application of Accounting Frameworks to Financial Accounting

Several accounting frameworks are available that provide the rules under which financial statements are to be constructed, so that the financials issued by the entities in an industry will be comparable. For a for-profit or nonprofit business, these rules are provided (in the United States) by the Generally Accepted Accounting Principles (GAAP) framework and (elsewhere) by International Financial Reporting Standards (IFRS) framework. If a company is publicly-held, additional rules are mandated by the Securities and Exchange Commission (SEC), if the business lists its shares on a stock exchange in the United States.

The Structure of Financial Accounting

Financial accounting involves the creation of a chart of accounts, so that financial transactions can be stored in a consistently-used set of accounts. There are also a number of policies and procedures that provide structure for how transactions are to be recorded into these accounts. Accounting software is used to store and organize the entered information. Once recorded, the financial statements and their associated set of disclosures are compiled and then released to users.

The Focus of Financial Accounting

The focus of financial accounting is outward - its work product is read by persons outside of a business, such as investors, creditors, and lenders. Since lawsuits can arise from the issuance of incorrect financial statements, a strong focus in financial accounting is on ensuring that the information presented fairly represents the financial position, cash flows, and results of a business.