What Is Financial Accounting and Why Should You Learn It?

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A closeup of a balance sheet.

In financial accounting, all of a company’s monetary transactions in a given period are recorded in financial statements. Documenting these transactions, such as income and expenses, helps determine the company’s operating health. Publicly traded companies commonly face pressure from their boards, investors, and other stakeholders to financially perform well.

Accounting and finance professionals learn financial accounting so they can provide clear, concise reporting. This knowledge can be acquired through a Master of Accountancy (MACC), a degree program that covers finance and accounting concepts.

The Purpose of Financial Accounting

Two well-known types of accounting are financial and managerial. Managerial accounting — also known as management accounting and cost accounting — is the area in which reports are generated for management and other internal users. These reports provide a basis for improving business efficiency and evaluating the financial soundness of projects.

Financial accounting, on the other hand, is the area in which reports are generated for external users: outside investors and the government, for example. The purpose of financial accounting is to prepare a company’s financial statements to reflect a specific period of time. The three most common varieties of financial statements are the balance sheet, income statement, and statement of cash flow.

All types of accounting reports are governed by generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS). GAAP and IFRS are intended to ensure transparency and accuracy. Students can learn why financial accounting is so vital by understanding events such as the Enron scandal in the early 2000s. This massive corporate failure heightened the importance of having clear, accurate financial statements and preventing illegal accounting practices.

Why Learn Financial Accounting?

Knowing a company’s financial health helps leadership make informed decisions regarding employee payroll, expansion, capital investment, developing new technologies, budgeting for particular departments, and more. By contrast, a lack of understanding of financial health may lead to poor decisions that can result in a company overextending itself — expanding too quickly or investing in new facilities it can’t afford.

Businesses use financial accounting to present their financial standing to third parties such as regulators, auditors, suppliers, and investors. This helps companies meet statutory and fiscal requirements, allows for in-depth performance analysis, and provides information to creditors and shareholders that can increase investment.

Learning financial accounting enables professionals to play a key role in keeping companies legally compliant, attracting investors, and helping executives make clear-eyed decisions about future plans.

Types of Financial Statements

As stated before, three primary financial statements are used in financial accounting. They include balance sheets, income statements, and cash flow statements.

Balance Sheet

The balance sheet reports the assets, liabilities, and equity of a company, which allows an investor to quickly see what a company owns, what it owes, and how much capital belongs to shareholders. A balance sheet is expected to show how the assets are equal to — or balance out — the liabilities and shareholders’ equity.

Income Statement

The income statement reports what a company earned in revenue over a given period; the costs incurred to generate this revenue are not included. When investors or accountants talk about the “bottom line,” they are referring to the net gain or loss on the income statement, or the profit and loss (P&L) statement.

Cash Flow Statement

The cash flow statement reports the cash and cash equivalents, such as short-term investments, that are moving into and out of a company. There are three parts to the cash flow statement: operating, investing, and financing activities.

Finance professionals may be familiar with financial statement ratios such as the debt-to-equity ratio and the inventory turnover ratio. While these ratios are not typically published on financial statements, investors use them to evaluate a company’s financial health, such as how much debt a company has compared with its equity.

Career Opportunities in Financial Accounting

Accounting and finance students who understand why learning financial accounting is valuable will find several in-demand and high-earning careers are available.

Financial Analyst

Financial analysts evaluate historical and current financial data and recommend investments or efficiency improvements. There are two types of financial analysts: buy-side and sell-side. Buy-side analysts create investment strategies for companies, while sell-side analysts provide advice to agents selling investments. The U.S. Bureau of Labor Statistics (BLS) projects that employment for financial analysts will grow 6% from 2020 to 2030. The 2020 median salary for a financial analyst was $83,660, according to the BLS.

Financial Manager

Financial managers prepare and analyze financial reports, sometimes leading a team of accounting employees. Employment of financial managers is expected to grow 17% from 2020 to 2030, compared with 8% for all occupations, according to the BLS. The 2020 median salary for financial managers was $134,180, according to the BLS.

Portfolio Manager

Portfolio managers look after a company’s investment portfolio. Portfolios contain various investment vehicles, such as stocks and bonds. A portfolio manager’s primary responsibility is to ensure the portfolio is growing. According to the compensation website PayScale, the median salary for a portfolio manager was approximately $88,000 as of September 2021. As portfolio managers are a type of financial analyst, job growth for that sector is similarly expected to increase 6% from 2020 to 2030, according to the BLS.

Financial Controller

Financial controllers oversee the preparation of financial reports. They often present these reports to executive leadership, offering insight into the company’s financial performance. Controllers are responsible for specific aspects of a company, such as accounting and auditing. PayScale reports the median salary for financial controllers was approximately $86,000 in September 2021. Job growth for controllers, classified as financial managers by the BLS, is projected to increase 17% between 2020 and 2030.

Personal Financial Advisor

Personal financial advisors meet directly with clients to discuss their financial goals and risk tolerance. A personal financial advisor can provide advice about a home purchase, estate planning, and family planning, among other goals. Most often, clients rely on an advisor to monitor their investments and help make decisions to improve their performance. Job growth for personal financial advisors is projected at 5% between 2020 and 2030. The 2021 median salary for personal financial advisors was $89,330, according to the BLS.

Accounting professionals know why learning financial accounting is central to a company’s success. Financial accounting provides a clear, accurate, honest picture of a company’s fiscal health. Those professionals who can support this process can find success in these careers and beyond.

Learn from Accounting Experts

The Ohio University Online Master of Accountancy program is designed to prepare students for success as financial professionals. The program is taught by faculty who have real-world experience, and its future-forward curriculum embraces the technology-driven dynamics of business.

Take the first step toward a career in financial accounting with Ohio University today.

Recommended Readings

Career Outlook: How to Become a CFO

How to Become a Certified Public Accountant

What Is an Enrolled Agent?

Sources:

Bench, How to Read (and Analyze) Financial Statements

The Balance, “How to Read Financial Statements”

Investopedia, “Financial Accounting”

Investopedia, “Sarbanes-Oxley Act of 2002 – SOX”

Investopedia, “What Are the Objectives of Financial Accounting?”

PayScale, “Average Portfolio Manager Salary”

PayScale, “Average Financial Controller Salary”

U.S. Bureau of Labor Statistics, Financial Analysts

U.S. Bureau of Labor Statistics, Financial Managers

U.S. Bureau of Labor Statistics, Personal Financial Advisors