Financial accounting refers to the type of accounting concerned with reporting financial information to the firm’s shareholders and creditors. This information is provided through the financial statements and supplementary information prepared in accordance with relevant accounting standards. For companies which are domiciled or have issued securities in the U.S., the accounting standards are U.S. Generally Accepted Accounting Principles (GAAP).
Financial accounting is in contrast with tax accounting and managerial accounting. Tax accounting refers to the calculation and presentation of business income or loss in accordance with the federal and state tax codes. Managerial accounting refers to financial information prepared to aid management in operating decisions. Managerial accounting is prepared solely for internal use.
The three major financial statements which financial accountants prepare are the income statement (profit and loss statement), balance sheet (statement of financial position), and cash flow statement. Under U.S. GAAP, firms must also provide a supplementary statement of changes in equity on a yearly basis.
When preparing the financial statements, financial accountants follow the accounting cycle. The accounting cycle is a series of steps which accountants follow when converting business transactions into financial statements. The finalized financial statements can then be made available through the relevant reporting channels.
If a business has publicly listed securities, it must follow additional rules put forth by the Securities and Exchange Commission (SEC).
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