Financial accounting refers to the financial performance and position of a firm through financial statements. These statements are issued to external users on a periodic basis. This major objective of financial accounting is of interest to creditors, investors and tax authorities. Financial accounting is conducted as per guidelines of Generally Accepted Accounting Principles (GAAP). The need to follow these guidelines is because of the mandatory need to report firm’s financial performance consistently and fairly.
Three basic concepts define financial accounting: modifying conventions, principles and assumptions. Modifying conventions include materiality, conservatism convention, cost-benefit and industry practices convention. Principles refer to matching principle, historical cost principle, full disclosure principle and revenue recognition principle. Assumptions include going-concern assumption, fixed time period assumption, separate entity assumption and stable monetary unit assumption.