Accounting activities can generally be classified as either financial accounting or managerial
accounting. An additional area of accounting, tax accounting, is beyond the scope of
this text. Because tax accounting is chiefly the external reporting of a business’s activities
to the Internal Revenue Service, data gathered for financial accounting forms the basis
for tax accounting.
Financial accounting consists of documenting all transactions of a company that have
an impact on the financial state of the firm, and then using these documented transactions
to create reports for external parties and agencies. These reports, or financial statements,
must follow the prescribed rules and guidelines of various agencies, such as the
Financial Accounting Standards Board (FASB), the Securities and Exchange Commission
(SEC), and the Internal Revenue Service (IRS).
Common financial statements include balance sheets and income statements. The
balance sheet is a statement that shows account balances such as cash held, amounts owed
to the company by customers, the cost of raw materials and finished-goods inventory, longterm
assets such as buildings, amounts owed to vendors, amounts owed to banks and
other creditors, and amounts that the owners have invested in the company. A balance sheet
is a good overview of a company’s financial health at a point in time, a key consideration
for a company’s creditors and owners. Figure 5-1 shows a balance sheet for Fitter Snacker.