Principles of Accounting
Good accounting practices are vital in running any business operation fluidly. In business, accounting is used to make critical decisions. It is the numbers. It is always about the numbers, and good, strong accounting skills are needed to understand and interpret these numbers. The purpose of this paper is to define the purpose of accounting, identify the four basic financial statements, and explain how they are interrelated and whom they are useful to.
“Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users” (Weygandt, Kimmel, & Kieso, 2008, p. 4). Economic events are ...view middle of the document...
From here, the end of the month (September 30th) profit or loss is added or subtracted from the retained earnings amount.
The next financial statement to be discussed is the balance sheet. The balance sheet is the assets, liabilities, and stockholders’ equity for a specific date. In other words, the balance sheet is a snapshot of a company’s financial condition. In the balance sheet the basic accounting equation is used. The basic accounting equation is, Assets = Liabilities + Stockholders’ Equity. Assets, the resources a business owns must equal all liabilities, claims against assets (existing debt, obligations, etc.), plus stockholders’ equity (total assets minus liabilities).
The final of the four financial statements is the statement of cash flows. The statement of cash flows is a summarized report that shows where the cash is flowing. In other words, it summarizes cash coming in and cash going out for a specific period. This report indicates the investing and financing transactions, net increase or decrease, and the cash amount as of the end of the period. The statement of cash flows answers three basic questions: Where did the cash come from? What was the cash used for? What was the change in cash balance for the period specified?
Each of the four financial statements have their own use and are interrelated, in that, they rely on one another for all four to be completed. The net income from the income statement is the first major piece. Once calculated, it can be added to the retained earnings statement to have the dividends subtracted and arrive at the retained earnings for a specific period. The last figure from the retained earnings statement is used to create the balance sheet. The cash from the balance sheet is needed to show the cash at the end of the period in the statement of cash flows. This is how the four financial statements are interrelated.
Users of Financial Statements
Since the financial statements have been...