Financial Accounting

"Financial accounting is the area of accounting that focuses on providing external users with useful information. In other words, financial accounting is a way of reporting business activity and financial information to investors, creditors, and other people outside the business organization."

Financial Statements

Financial statements are reports prepared by a company’s management to present the financial performance and position at a point in time. A general-purpose set of financial statements usually includes a balance sheet, income statements, statement of owner’s equity, and statement of cash flows. These statements are prepared to give users outside of the company, like investors and creditors, more information about the company’s financial positions. Publicly traded companies are also required to present these statements along with others to regulator agencies in a timely manner.

Financial Reporting

Financial reporting refers to the communication of financial information, like financial statements, to the financial statement users, like investors and creditors. Financial reporting is typically viewed as companies issuing financial statements. A general purpose set of financial statements include a balance sheet, income statement, statement of owner’s equity, and statement of cash flows, but financial reporting is much more broad than just as set of financial statements. Financial reporting includes all financial communication from the business to outside users including press releases, shareholder minutes, management letters and analysis, auditor reports, and even the notes of the financial statements. Basically, anything that can convey financial information to the public is considered financial reporting of some kind.

Balance Sheet

A balance sheet is one of four basic accounting financial statements. The other three being the income statement, state of owner’s equity, and statement of cash flows. The balance sheet uses the accounting equation (assets = liabilities + owner’s equity) to show a financial picture of the business on a specific day. In other words, a balance sheet lists all of the assets that a company owns as well as the debts owed by the company and the owner’s interest or ownership share in the company. Assets are listed separately first and liabilities and owner’s equity are listed together second. Think about the accounting equation.
Assets = Liabilities + Owner’s equity.
Assets have to total the sum or liabilities and owner’s equity. This is where the “balance” in balance sheet comes from. Assets have to balance with liabilities and owner’s equity.

Income Statement

The income statement also called a profit and loss statement is a report made by company management that shows the revenue, expenses, and net income or loss for a period. The income statement is one of the main four financial statements that are issued by companies: balance sheet, income statement, statement of owner’s equity, and statement of cash flows.

The income statement shows income and expenses for a specific period of time. This could be monthly, quarterly, semi-annually, or annually. A January income statement for example would show all the income and expenses for the month. It would also show the net income or loss at the end of January. Income statements created for management are usually shorter in time frame. These weekly or monthly income statements help management evaluate the company’s performance. Quarterly and annual income statements are more commonly used by investors and creditors to track the overall performance of the company.

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