Financial accounting is the practice of creating and maintaining records of financial transactions. It is integral to planning, and the continual growth and success of a business. Financial accounting systems capture and store detailed records of all financial and economic activities of an organization. These records serve as representations of the fiscal health and performance of the business, and are used in decision-making processes, risk management, and investment planning. Additionally, financial accounting provides an independent and objective record of financial activities for stakeholders, such as lenders, investors, and creditors.

Financial accounting is governed by a broad set of rules and regulations that dictate the methods, processes, and standards for financial recordkeeping. Generally, accepted accounting principles (GAAP) are a set of financial accounting standards and procedures used to record, prepare, and analyze the financial information of a business. All public companies in the U.S., as well as those that participate in certain financial instruments, are required to use the accrual method of accounting in accordance with GAAP.

Financial statements are an important aspect of financial accounting. They include balance sheets, income statements, statements of cash flow, and statements of changes in shareholder equity. Balance sheets provide a snapshot of a company’s assets and liabilities, as well as the capital investment of shareholders. Income statements report revenues, expenses, and profits. Statements of cash flow track how cash moves in and out of a business, while statements of changes in shareholder equityNote that financial statements must be prepared with GAAP in mind, to ensure they are accurate and provide an accurate portrayal of the company’s financial position.

While it is not a requirement for all businesses to use financial accounting, it is essential for any organization that wants to protect and grow its financial resources. Accurate financial records are a strong foundation for risk management, investment planning, budgeting, and as mentioned earlier, decision-making. Without good financial accounting, it would be impossible for a business to confidently assess the performance of their operations and ensure financial security for the future.