Business Knowledge

Financial Accounting: Applied Frameworks

Your Guide to Financial Reporting Rules

Every business tells its financial story by the book. Here are the books.

1. The Rulebooks (Frameworks)

  • GAAP (Generally Accepted Accounting Principles):
    • Primarily used in the US.
    • More “rules-based.”
  • IFRS (International Financial Reporting Standards):
    • Used in most other major economies.
    • More “principle-based.”
    • Why care? Ensures comparability and consistency.

2. The 3 Main Financial Reports These are the output of financial accounting, governed by the rules above.

  • Income Statement (P&L):
    • Shows profitability over a period (e.g., quarter, year).
    • Revenue - Expenses = Profit.
  • Balance Sheet:
    • Shows financial position at a specific point in time.
    • Assets = Liabilities + Equity.
  • Cash Flow Statement:
    • Shows cash movement over a period.
    • Separates cash from Operations, Investing, Financing.

Your Action:

  • Know which framework your company (or a company you’re analyzing) uses.
  • Understand the basic purpose of each of the three statements.

Golden Rule: Consistent accounting standards allow investors and managers to compare “apples to apples” and make informed decisions.