Introduction: What is Financial Accounting?

Just what is financial accounting? The aim of accounting is to provide useful and reliable information about businesses and non-profits. Financial accounting seeks to determine a firm’s economic performance and its condition. Did it make a profit or loss last year? What assets and liabilities did the business have at the end of the year?

Non-profit accounting asks the same questions but with a few important twists. With these organizations we are less interested in the question of profit and loss and more interested in evaluating how resources were used. How much was spent on support and fund raising compared with expenses more directly related to a non-profits mission? We also seek to track how well non-profits complied with donor restrictions on use of resources.

Financial and non-profit accounting mainly looks backward. It addresses past economic performance and condition. In contrast to this, management or cost accounting is forward looking. Here we analyze historical information to find cost and revenue patterns that allow managers to make better operating decisions in the future.

None of the different branches of accounting are rocket science. In fact, contrary to popular belief, accounting is not a very precise science at all. Even absent fraudulent manipulation accounting reports provide us with only approximations about economic performance and condition. How close these approximations are to reality varies greatly from business to business.

This web site will briefly describe the main rules and procedures used in the major branches of accounting. More importantly this site will help the business owner, non-profit manager, student or business adviser learn to evaluate the reliability and usefulness of accounting information. Sometimes accounting information is very useful, but often it is not. For this reason all users of accounting information should have some understanding of accounting’s inherent limitations. And of course no tour of accounting can be complete without a discussion of its deliberate misuse by unscrupulous managers. So this site will also describe the most common accounting frauds.