Financial Accounting
Financial accounting (versus managerial or cost accounting) gives information about a company's fiscal health for an external audience, usually its investors and financial partners, i.e. not for its internal management, but instead for people who live "outside the firm." People like investors, lenders, and regulators. Financial accounting includes things like the production of the filings of 10K, 10Q, and annual reports, the documents investors and regulators pore over to ascertain how well or poorly the company is managing. It also includes documentation for audits.
Mess it up, and suddenly there are people wearing SEC windbreakers in your office, confiscating your computer. Or you end up restating results some time in the future, sending your stock into tailspin, sending the company into bankruptcy. Fun stuff.
Time to announce Little Thrones' quarterly results to Wall Street. Lenny and the management team don't want to give away too much information (all the competitors will be on the phone). But they need to let their shareholders know how their company is performing.
So when they issue their report, they don't break it down by product. They give the total quarterly revenue...$1.65 million. And the total quarterly operating profit of $838,500. And the overall operating margin of 50.8%. But they keep the other details within the company. Nothing about the individual products. Nothing about the secret world-domination lair.
Because it gets sent to outsiders, the financial accounting info tends to be less detailed than the cost accounting figures. It's just enough to give a picture of the company's financial situation...without giving away too much. Different audience. Different goal. Also, financial accounting has a backward-looking vibe and bias. Executives use cost accounting to optimize production going forward: that's the domain of managerial accounting.
Financial accounting is more of a record of what’s already happened. It’s basically closing the books on a time period. Think of it this way: cost accounting is like a detective’s notes that he takes while trying to solve a mystery. Financial accounting is like the true crime book he publishes based on those notes. He uses the notes to solve the case. The book just sums everything up. And, uh...provides a way to cash in.
Another way to look at it:
Every year, the Bufflemans send out a year-end newsletter to all the friends and family on their Christmas card list. It includes stuff like:
“We’re so proud of Bernie for getting an "A" in biology this year.” And...
“We're so happy that Beatrice got her driver's license last month.” And...
“We're hopeful Buster's latest trip to rehab finally does the trick!”
Things like that...think of that kind of reporting as the family communication equivalent of financial accounting. Everything boiled down. Only as much information as necessary.
Meanwhile, Benny Buffleman keeps a diary. It includes stuff like:
“Bernie originally got an "C-" in biology, but I threatened to sue the school, so they upped his grade.” And...
“Beatrice almost sideswiped a school bus during her third attempt on the driving test, but I slipped the guy at the DMV a $50 and they let it slide.”
Think of those examples like cost accounting. More detail. Different audience. Benny is just writing it for himself. An internal audience. Real, uh...sausage-getting-made type information...