Financial accounting is a specific type of accounting that is used by businesses to prepare reports on the finances of a firm for people outside of the organization, such as stockholders or government agencies. It is governed by specific accounting standards to insure uniformity in reporting.


The function of financial accounting is to prepare reliable reports on a business's financial state at any given time. Corporations and other large businesses typically prepare reports on a regular schedule; at a minimum, yearly. A financial accounting report does not interpret, or provide advice on, the financial health of a company. Rather it reports objective financial information in a specific format for the viewer to interpret.


Financial accounting creates a public record of a company's historical financial performance, which allows stockholders and other stakeholders outside of the organization to get a clear picture of a business's financial health. Because financial accountants must follow a strict set of accounting principles, stakeholders can be assured that the information they are receiving is accurate and objective. They can then make predictive assumptions on performance and base future financial decisions on these assumptions.


There are two primary types of business accounting: managerial and financial accounting. Managerial accounting focuses on interpreting financial information for use within the company to assist managers in making decisions. Managerial accounting reports can be presented in any format, and do not have to adhere to specific accounting principles, except insofar as good practice and ethical standards are followed. Financial accounting follows generally accepted accounting principles (GAAP) and is not used for internal decision-making. One very important distinction between managerial and financial accounting is that a managerial accounting report is future-oriented and addresses the financial needs of the company, while a financial accounting report is based strictly on historical, past financial performance.


As financial accounting statements are used by many different people outside of an organization, financial accounting follows a set of standards that include what are called 'generally accepted accounting principles' (GAAP). The Financial Accounting Standards Board (FASB) is a U.S.- based organization that develops these standards. While financial accounting specialists are, CPAs (Certified Public Accountants), many organizations prefer to hire CMAs (Certified Management Accountants) to take care of internal financial records, as they are specifically trained in preparing reports regarding internal cost measures and accounting for managerial review.

Careers in Financial Accounting

In order to pursue a career in financial accounting, one must complete an approved program of study to become a CPA, certified public accountant. There are a number of schools that offer Associate degrees in accounting; however, some employers prefer to hire accounts who have completed a Bachelors degree in Accounting with additional coursework in business. All CPAs must pass a licensure exam to qualify to practice as a CPA. The U.S. Bureau of Labor Statistics states that the job outlook for CPAs is excellent, with above-average job growth, owing to increasing numbers of businesses and "greater scrutiny of company finances."