Financial accounting is a specialized branch of accounting
that keeps track of a company's financial transactions. Using
standardized guidelines, the transactions are recorded, summarized, and
presented in a financial report or financial statement such as an income
statement or a balance sheet.
Companies issue financial statements on a routine schedule. The statements are considered external
because they are given to people outside of the company, with the
primary recipients being owners/stockholders, as well as certain
lenders. If a corporation's stock is publicly traded, however, its
financial statements (and other financial reportings) tend to be widely
circulated, and information will likely reach secondary recipients such
as competitors, customers, employees, labor organizations, and
investment analysts.
It's important to point out that the purpose of financial accounting
is not to report the value of a company. Rather, its purpose is to
provide enough information for others to assess the value of a company
for themselves.
Because external financial statements are used by a variety of people
in a variety of ways, financial accounting has common rules known as accounting standards and as generally accepted accounting principles (GAAP).
In the U.S., the Financial Accounting Standards Board (FASB) is the
organization that develops the accounting standards and principles.
Corporations whose stock is publicly traded must also comply with the
reporting requirements of the Securities and Exchange Commission (SEC),
an agency of the U.S. government.
Income Statement
The income statement reports a company's profitability during a
specified period of time. The period of time could be one year, one
month, three months, 13 weeks, or any other time interval chosen by the
company.
The main components of the income statement are revenues, expenses,
gains, and losses. Revenues include such things as sales, service
revenues, and interest revenue. Expenses include the cost of goods sold,
operating expenses (such as salaries, rent, utilities, advertising),
and nonoperating expenses (such as interest expense). If a corporation's
stock is publicly traded, the earnings per share of its common stock
are reported on the income statement. (You can learn more about the
income statement at Explanation of Income Statement.)