Definition: 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.
What Does Financial Accounting Mean?
Investors and creditors are often called external users because they are people outside of the organization who use the company financial information to make decisions. The most common form of financial information issued to external users by companies is a general purpose set of financial statements.
These financial statements, along with financial accounting standards in general, must be held to strict rules, so the financial statements will be useful and of high quality. That is why GAAP governs the principles and standards of financial accounting. GAAP requires that accounting information be relevant, reliable, and consistent among other things. This insures that external users will be able to have quality information to base their financial decisions on.
All external users have different needs when it comes to financial information. For instance, a lender is primarily concerned with a company’s cash flow and ability to repay loans with interest. An investor, on the other hand, is more concerned with company profit performance and longevity.
The overall purpose of financial accounting is to create information or financial statements that can be used by all external users to base their financial decisions on whether or not these decisions involve lending money or investing money.
Accounting for internal users is typically considered managerial accounting and is subject to less stringent standards and requirements.