Financial accounting is the branch of accounting responsible for collecting, measuring, and communicating economic information about a company to external users such as investors, creditors, suppliers, and regulatory agencies.
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The main objective of financial accounting is to provide useful, reliable, and comparable information for decision-making by users external to the company.
Characteristics of financial accounting
- External orientation: Designed for users outside the company
- Standardized: Follows generally accepted accounting principles
- Historical: Records transactions that have already occurred
- Periodic: Reports are prepared at regular intervals
- Monetary: All information is expressed in monetary units
Main financial statements
Financial accounting produces several key reports:
1. Balance Sheet
- Shows the financial position at a specific moment
- Lists assets, liabilities, and equity
- Must always balance: Assets = Liabilities + Equity
2. Income Statement (Profit & Loss)
- Shows revenues and expenses for a period
- Calculates net profit or loss
- Measures company performance
3. Cash Flow Statement
- Shows cash inflows and outflows
- Divided into operating, investing, and financing activities
- Essential for liquidity analysis
4. Statement of Changes in Equity
- Shows changes in owner’s equity during the period
- Includes retained earnings and capital contributions
Accounting principles
Financial accounting follows fundamental principles:
- Accrual principle: Record transactions when they occur, not when cash changes hands
- Matching principle: Match revenues with related expenses in the same period
- Conservatism: Be cautious in estimates and recognize losses promptly
- Materiality: Focus on items significant enough to affect decisions
- Consistency: Use the same accounting methods from period to period
Users of financial accounting
External users:
- Investors and shareholders
- Banks and creditors
- Suppliers and customers
- Tax authorities
- Regulatory agencies
- General public
Internal users:
- Management (though they also use management accounting)
- Board of directors
- Employees and unions
Regulatory framework
In Spain, financial accounting is regulated by:
- General Accounting Plan (Plan General de Contabilidad)
- Commercial Code (Código de Comercio)
- Companies Law (Ley de Sociedades de Capital)
- International Financial Reporting Standards (for certain companies)
We hope this information is very useful to you.