ELI5: Explain Like I'm 5

Financial accounting

Okay, imagine that you have a piggy bank where you put all your coins and you like to count how much money you have saved. Financial accounting is like that except for companies and businesses. They also need to keep track of how much money they are earning and spending because they want to know if they are making a profit (that means they are earning more money than they are spending) or losing money (that means they are spending more money than they are earning).

So, financial accounting is a way to record all the money that comes in and goes out of a company. The people who do this job are called accountants. They use a lot of numbers and tables to keep track of all the money.

They start by recording every transaction, that's just a fancy word for every time the company gives or receives money. For example, if a company sells a product to a customer, they receive money, and that's called revenue. If the company buys something, like a new computer or a piece of equipment, they spend money, and that's called an expense.

The accountants put all these transactions in different categories called accounts, which helps to see where the money is coming from and where it is going. These accounts can be things like sales revenue, rent expense, payroll expense, and many more.

At the end of each month, the accountants take all the transactions and accounts and make some very important reports. One of these reports is called the income statement, which shows how much revenue the company made, and how much they spent on expenses. The other report is called the balance sheet, which shows how much money the company has in the bank or in investments, how much they owe to other people, and how much money their shareholders own.

These reports help companies understand if they are doing well or if they need to make some changes to their spending. It also helps investors, bankers, and other people who are interested in the company to decide if they want to lend money to the company or invest in it.

So, in a nutshell, financial accounting is the way companies keep track of all their money and make important reports to understand how their business is doing financially.