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Lesson 1: Introduction to Accounting and Business

Financial and Managerial Accounting 

The accounting profession can be divided into different types. The two types that we will discuss in this course are financial and managerial accounting. Others in the profession include  analysts, auditors, forensic accountants, consultants, and financial advisors.

Financial accounting provides financial information about the business entity in the form of financial statements to outsiders, such as creditors, stockholders, government agencies, and so on. The financial statements include:

  1. income statements,
  2. statements of retained earnings (or statements of stockholders' equity),
  3. balance sheets, and
  4. statements of cash flows.

Financial accounting has a defined set of rules and regulations (Generally Accepted Accounting Principles, or GAAP) and an emphasis on the past (historical). We prepare financial statements on a monthly, quarterly, and yearly (annual) basis, in the order listed above.

Internal users (managers) are in need of financial information in their decision-making about the daily operation of the business. The purpose of managerial accounting is mainly to provide financial information about the business in the form of special reports and summaries to managers for internal operational  use. Managerial accounting has a future emphasis. We are preparing budgets and the like to help managers in their planning process.

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Time: 00:03:55 Video 1.2 Transcript

The accounting profession can be divided into several different types of accounting. And the first type that we talk about is financial accounting. Financial accountants provide information to management and to stakeholders about the economic position of the company. They create the historical record, what really happened over the course of the last financial period. It reports the data that are necessary to formulate strategies and policies concerning the operations of the company.

Why do they do this? Well, they do this to enable managers to make decisions about a current business environment. It enables stakeholders to determine their relationship with the company. Do they want to buy shares, sell shares? Do they want to do business with this company? Will they be able to collect any amounts that might be owed them? Would you like to purchase a product or a service from this company?

So the financial records that are created by financial accountants provide the necessary information to make these determinations. It enables a government to determine whether the company's met its legal obligations, to ascertain the economic situations, and it enables competition to evaluate how their industry is doing and to create industry standards.

So when we talk about financial accounting, these are the historians. They analyze each transaction and identify how the transaction actually occurred.


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