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What Is Financial Accounting?

Financial accounting involves the process of preparing financial statements for a business. This extravaganza involves three major components: accounting information, type of business entity, and user of the financial statements.

The three financial statements are the income statement, balance sheet, and statement of cash flows.

Following is a brief description of each:

  • Information: Any accounting transactions the business completes during the accounting period. These transactions include generating revenue from the sales of company goods or services, paying business-related expenses, buying company assets, and incurring debt to run the company.

  • Business entity: The company incurring the accounting transactions. Important in this consideration is the type of business entity; some accounting transactions require different treatment, depending on the type of entity.

    The three types of business entities are sole proprietorships (one owner), corporations, and flow-through entities, like a partnership.

  • User: The persons or businesses that need to see the accounting transactions organized into financial statements to make educated decisions of their own.

Most intermediate accounting textbooks hone in on the corporate business entity. Corporations are separate legal entities, with oversight by a board of directors and owned by its shareholders.

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