Past transactions and events are the raw materials for the financial accounting process. Transactions typically involve an exchange of resources between the firm and other parties. For example, purchasing equipment with cash is a transaction that would be incorporated in the firm’s financial accounting records. Purchasing equipment on credit is also a transaction; equipment is obtained in exchange for a promise to pay for it in the future.
Financial accounting also incorporates significant economic events that do not involve exchanges with other parties. For example, assume that a firm owns an uninsured automobile that is completely destroyed in an accident. Financial accounting would reflect the effect of this event.
Keep in mind that financial accounting deals with past transactions and events. It provides information about the past performance and current financial standing of a firm. Financial accounting itself does not usually make predictions about the future. Although financial statement users need to assess a firm’s future prospects, financial accounting does not make these predictions, but it does provide information about the past and present that is useful in making predictions about the future.