Financial accounting is a specialized branch of accounting that keeps track of a company’s financial transactions. Using standardized guidelines, the transactions are recorded, summarized, and presented in a financial report or financial statement such as an income statement or a balance sheet.
In simple terms, financial accounting is the practice of accounting for all money going in and out of an organization. It involves recording, classifying, summarizing, and analyzing all financial transactions.
Why Is Financial Accounting Important?
Financial accounting is important for businesses because it helps them keep track of their financial transactions. In turn, they can make sound decisions on how to allocate their resources. In addition, financial accounting helps you communicate your business finances to outside parties such as creditors and investors. The financial statements generated provide all the necessary information to other parties, which will either encourage or discourage them from partnering with your business.
Who uses financial accounting?Â
External stakeholders use financial accounting to see the current state of business. For example, shareholders will want to see financial reports before deciding to invest in a business. While suppliers need to see a firms’ financial health before extending credit for services. Next, brokers use a company’s financial reports to determine the value of its stocks and shares. And auditors, governments, and regulatory bodies rely on financial reporting to ensure legal and tax compliance.
Financial accounting should not be confused with managerial accounting, which is used internally by managers (hence the name) to help guide decision-making within a business. Whereas financial accounting, as we’ve just established, serves external stakeholders.
