What Is Financial Accounting?

Tue Oct 26, 2021

Do you want to advance your career in accounting? You've landed the right page!

Accounting's aim is to collect and report financial information on a company's performance, financial status, and cash flows. If you’re looking specifically into financial accounting, this article is for you.

We've put down all you need to know about the niche and its operations, so keep reading!

Table of Contents

The Importance of Accounting

Why Is Accounting Necessary? Accounting is essential in company since it allows you to manage income and expenses, maintain statutory compliance, and offer investors with information.

Your records create three important financial statements.

  • The income statement informs you of the company's profit and loss.
  • The balance sheet provides a clear picture of your company's financial situation on a certain day.
  • The cash flow statement serves as a link between the income statement and the balance sheet, reporting the cash earned and spent during a certain time.

If you do want to keep your business solvent, you must maintain your financial records clean and up to date.

What is Financial Accounting?

Financial accounting is a subset of accounting that involves the process of documenting, summarizing, and reporting a plethora of transactions. These are ones occurring from corporate operations across time.

These transactions are summarized in financial statements such as the balance sheet, income statement, and cash flow statement. These documents document the company's operating performance over a specific time.

Financial accountant jobs are available in both the public and commercial sectors.

The responsibilities of a financial accountant may be different from those of a general accountant, who works for himself or herself rather than for a corporation or organization.

The Working of Financial Accounting

Financial accounting makes use of a set of pre-established accounting concepts.

The accounting principles used during the process of financial accounting are determined by the regulatory and reporting obligations that the firm encounters.

Net income is calculated at the bottom of the income statement because of financial accounting. The balance sheet shows assets, liabilities, and equity accounts.

Financial accounting is used on the balance sheet to represent ownership of the company's future economic rewards.

The purpose of establishing these accounting rules is to offer investors, creditors, regulators, and tax authorities with uniform information.

  • Financial accounting uses either the accrual or cash foundation of accounting.
  • Financial accountants are employed by non-profits, companies, and small enterprises.
  •  Financial statements are used in five different categories for financial reporting.

Financial accounts include the five major categories of financial data:

  • Revenues
  •  Costs
  • Assets
  • Liabilities
  • Equity

The income statement accounts for and reports revenues and costs. They can cover everything from research and development to payroll.

International public corporations commonly issue financial statements that comply with International Financial Reporting Standards.

The Accrual Method vs. the Cash Method

The accrual technique, the cash method, or a mix of the two can be used to accomplish financial accounting.

Accrual accounting includes documenting transactions after they have occurred, and the income is identifiable.

Cash accounting is the practice of documenting transactions only when cash is exchanged. Revenue is only recorded when payment is received, and costs are only recorded when the obligation is paid.

Managerial Accounting vs. Financial Accounting

The primary distinction between financial and management accounting is that financial accounting is concerned with giving information to those outside the business.

Managerial accounting information, on the other hand, is intended to assist managers inside an organization in making choices.

The creation of financial statements using accounting standards is particularly relevant to regulatory entities and financial institutions.

Internal management employs various accounting rules and processes since many accounting standards do not translate well into business operation management. This will be used for internal business analysis.

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Accounting with Two Entries

Every transaction in a business impact at least two accounts. The double-entry accounting system captures both the positive and negative outcomes of a transaction.

The transaction is recorded as a debit in one account and as a credit in another.

Debit entries account for an increase in assets (what you own) and costs (what you spend), whereas debit entries account for a drop in debt, equity, and income.

Credit entries, on the other hand, account for a drop in assets and costs as well as a rise in obligation (what you owe), equity, and income (what you receive).

The debit and credit inputs must be always equal. The double-entry bookkeeping system is the most effective approach to track a company's financial progress. This is while limiting human mistakes in financial accounting.

Financial Reports

Most businesses prepare quarterly and annual financial statements and make them available to shareholders and the investing public.

In the business sector, four fundamental financial statements are used to demonstrate a company's financial performance:

The Income Statements

This is also known as the profit and loss statement, that covers a certain time period (such as a quarter or a year). Revenues – Expenses = Net Income on an income statement.

Revenue is usually documented in the period of the sale of products and services, which may not be the same period when cash is received, according to Generally Accepted Accounting Principles (GAAP).

The Balance Sheet

At the end of each accounting period, the balance sheet is a listing of assets and liabilities. To put it another way, the balance sheet is a financial picture taken at a certain point in time. Assets = Liabilities + Stockholders' Equity in a balance sheet.

The amount of finance given by operations (retained earnings not dispersed to shareholders) and stockholders who reinvest via contributed capital is referred to as stockholders' equity.

The Cash Flow Statement

In contrast to the net income on the income statement, which is a non-cash statistic, the cash flow statement depicts the real flow of cash into and out of a firm during a certain period.

A cash flow statement displays the cash flows generated by operating, investing, and financing operations.

The Retained Earnings Statement

The statement of retained earnings covers a given time and displays the dividends paid to shareholders. This is from earnings as well as the earnings retained by the firm.

Notes to financial information given extra information about a company's financial status.

The three types of notes define accounting principles used to generate the reports, provide further data about an item on the financial statements, and provide additional information on an item not on the assertions.

The Scope of Financial Accounting

Financial accounting is an important tool for management as well as for external users like as shareholders, future owners, creditors, consumers, workers, and the government.

It gives information on the outcomes of its activities as well as the company's financial situation. The functional domains of financial accounting are as follows:

Managing Financial Transactions

Accounting, as a procedure, only deals with transactions that can be measured in terms of money. Anything that cannot be stated in monetary terms, no matter how substantial, is not included in financial accounting.

Information recording

Accounting is the skill of documenting a company's financial activities.

Human memory has a capacity limit. It is impossible to recall all the company's dealings.

As a result, the information is recorded in a series of books known as the Journal, as well as other subsidiary books, and it is important for management in its decision-making process.

Data classification

The recorded data is organized in such a way that transactions of similar kind are grouped together in one location, allowing detailed information about these products to be collected under different headings. This is done in the book 'Ledger.'

For example, we may have accounts labelled 'Salaries,' 'Rent,' 'Interest,' 'Advertisement,' and so on. A trial balance is created to ensure the mathematical correctness of such accounting.

Generating Summaries

The trial balance's classified information is used to produce the profit and loss account and balance sheet in a way that is relevant to accounting information consumers.

The final accounts are created to determine the business's operational effectiveness and financial soundness.


It is the process of creating the link between the profit and loss account and the balance sheet items.

The goal is to discover the company's financial strengths and weaknesses. It also serves as a foundation for interpretation.

Financial information interpretation

It is focused with elucidating the relevance and meaning of the link revealed by the analysis. It should be beneficial to users for them to make sound judgments.

Communicating the Findings

The profitability and financial situation of the company are conveyed to interested parties at regular intervals to help them draw their own judgments.


What are the different kinds of financial accounting?

Financial accounting is classified into two types: cash accounting and accrual accounting. To correctly record financial transactions, both techniques employ double-entry accounting.

While extremely small firms commonly employ cash accounting, all bigger enterprises and publicly listed companies must use accrual accounting.

What is financial accounting, and what is an example of it?

Financial accounting is a branch of accounting that deals with the process of documenting, summarizing, and reporting a wide range of transactions.

For example, if an employee is on a work trip, they can use cash to pay for meals, housing, and other incidental costs.

They keep a receipt after each cash transaction and report all transactions to their management.

What is the primary function of financial accounting?

A Financial Accountant oversees an organization's accounting and financial operations.

They assess the company's fiscal soundness and give financial data to other departments, allowing them to make budgeting and investment choices.

What are the two main types of accounting?

Cash accounting and accrual accounting are the two basic accounting procedures.

When revenues and costs are collected and paid, they are recorded in cash accounting. Revenues and costs are recorded in accrual accounting as they occur.

Summing Up

Financial accounting is a subset of accounting that is concerned with the recording, summarization, and reporting of a company's financial activities.

If you’re looking to venture into the field, we hope this article has helped you pave the way. If you're already an expert and believe we missed something, please let us know in the comments!


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