Financial accounting

Financial accounting is a specific branch of accounting. It focuses on the summary, analysis, and reporting of financial transactions. These transactions relate to the activities of a business. The main goal is to prepare financial statements for public use. These reports provide essential data to many different people. These people are known as stakeholders. Stakeholders include stockholders, suppliers, and banks. They also include employees, government agencies, and business owners. These groups use the information to make important decisions about the company.

There are different ways to use accounting information. Financial accounting is mostly for people outside an organization. It is not for those involved in daily operations. In contrast, managerial accounting helps managers make internal decisions. This helps them manage the business day-to-day. Another type is cost accounting. Cost accounting aims to compute the cost of a specific production or service. It helps a company facilitate cost control. This process can help a business reduce its overall costs.

To keep reports consistent, professionals use specific rules. The International Financial Reporting Standards, or IFRS, are a set of these rules. The IFRS state how particular transactions and events should be reported. These standards are issued by the International Accounting Standards Board (IASB). The IFRS Conceptual Framework from 2010 defines the objectives of financial reporting. One goal is to provide useful information to investors and lenders. This helps them decide about providing resources to a reporting entity. Another objective mentioned by the European Accounting Association is capital maintenance.

Financial statements consist of three main components. The first is the cash flow statement. This statement considers the inputs and outputs of concrete cash. It covers a specific stated period of time. The formula is: Cash Inflow minus Cash Outflow plus the Opening Balance equals the Closing Balance. The second component is the income statement. This represents changes in the value of a company's accounts. It usually covers one fiscal year. It may compare current changes to the previous period. The final result is the net income, or net loss if income is less than zero.

Calculating profit involves several specific steps on the income statement. First, you start with sales, which is also called revenue. Then, you subtract the cost of goods sold. Next, you subtract selling, general, and administrative expenses, known as SGA. You also subtract depreciation and amortization. This result is called earnings before interest and taxes, or EBIT. Finally, you subtract interest and tax expenses. The remaining amount is the actual profit or loss. This "bottom line" summarizes the entire period for the reader.

The third main component is the balance sheet. This statement shows assets, liabilities, and equity at a specific point in time. This point is usually the end of the fiscal year. The balance sheet follows the basic accounting equation: Assets = Liabilities + Equity. This means total assets must always equal the combined liabilities and equity. There are different ways to list these items. A GAAP-compliant balance sheet lists items by decreasing liquidity. This means the most liquid items come first. However, an IFRS-compliant balance sheet uses increasing liquidity. This means non-current items are listed before current items.

Equity, or owner's equity, is also called net assets. The way it is shown depends on the business type. A business might be a sole proprietorship, a partnership, or a corporation. In a corporation, equity usually shows common stock and retained earnings. Retained earnings are profits from previous years kept in the company. A separate statement of retained earnings helps track this. It shows how income distribution and dividends affect shareholder wealth. The formula is: Retained earnings at the beginning plus Net Income minus Dividends equals the end balance.