Financial Accounting

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Financial Accounting is the systematic process of recording, summarizing, and reporting a company’s financial transactions over a period of time. These transactions are summarized in the preparation of financial statements—including the balance sheet, income statement, and cash flow statement—that convey the company’s financial performance and position to external users. The primary goal is to provide reliable, comparable, and relevant financial information to stakeholders like investors, creditors, and regulators for decision-making.

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The Core Financial Statements: Financial accounting produces three key statements:
- Income Statement: Shows profitability (revenue and expenses) over a period.
- Balance Sheet: Provides a snapshot of financial position (assets, liabilities, and equity) at a point in time.
- Cash Flow Statement: Reports the inflows and outflows of cash from operating, investing, and financing activities.
The Foundation of GAAP/IFRS: Financial accounting is governed by a common set of rules and standards known as Generally Accepted Accounting Principles (GAAP) in the U.S. or International Financial Reporting Standards (IFRS) globally. These standards ensure consistency, comparability, and reliability across different companies.
The Double-Entry System: Every financial transaction is recorded using a double-entry bookkeeping system, where every debit has a corresponding credit. This system ensures that the accounting equation (Assets = Liabilities + Equity) always remains in balance, maintaining the integrity of the financial data.