Financial accounting, financial reporting, and financial statements are related but separate concepts that accountants use in the day-to-day function of their jobs. Financial accounting is a branch of accounting that keeps tabs on a company’s financial transactions. The transactions are recorded, summarized, and presented in a financial report or a financial statement such as a balance sheet or income statement.
Financial statements are external–they are provided to people outside of the company, such as lenders, owners, and stockholders. If a company’s stock happens to be publicly traded, the information can be widely circulated, ending up in the hands of customers, employees, competitors, and more.
An important distinction to make is that financial accounting is not meant to report the value of a company, but rather to provide information for others to assess the value of the company for themselves.
Financial accounting has rules known as accounting standards and generally accepted accounting principles (GAAP) to accommodate the fact that financial statements are used in a variety of ways by a variety of people.
What are financial statements?
Financial accounting generates external financial statements, such as income statement, balance sheet, statement of cash flows, and statement of stockholders’ equity.
An income statement reports a company’s profitability. It can report on a specific period of time at any time interval chosen by the company.
A balance sheet is organized into assets, liabilities, and stockholders’ equity at a specific date (usually, the last day of an accounting period).
A statement of cash flows indicates the change in a company’s cash or cash equivalents during a specific time interval.
A statement of stockholders’ equity indicates changes in stockholders’ equity for the time period of the income statement and cash flow statement.
How are financial statements different from financial reporting?
Financial reporting is a broader concept that financial statements, including not just financial statements (such as income statement, balance sheet, statement of cash flows, and statement of stockholders’ equity), but also a company’s annual report to stockholders, its proxy statement, its annual SEC report (Form 10-K), and additional financial information.
Financial reporting compiles all pertinent financial information for distribution to those outside of the company. Examples of financial reporting include:
- Financial statements
- Quarterly and annual reports
- Quarterly earnings distributed via press releases, conference calls, or company website
- Quarterly and annual reports for governmental agencies such as the Securities and Exchange Commission (SEC)
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