Accounting is a body of principles and conventions as well as established general process for capturing financial information related to an entity’s resources and their use in meeting the entity’s goals (Kaliski, 2007). It is essential for companies to have educated and trained accountants to analyze and maintain their financial information. Accountants use four different types of financial statements to accomplish this. The purpose of accounting is to provide insight into finances.
It could be a company or an individual person’s finances. Accounting is used to show how a company is doing financially and companies use the information to make important economic decision. Accounting consists of three basic activities-it identifies, records, and communicates the economic events of an organization to interested users (Weygandt, 2008). Accountants identify economic events like sales of goods and services relevant to the business. They record these events to keep an accurate financial history of these events.
The recordings are kept in chronological order to keep records organized and more accurate. The records of information become accounting reports, which are communicated to others who have some interest or stake in the company. Those records are analyzed, interpreted, and used to make important business decisions regarding the company’s future. The most common types of accounting reports are called financial statements. They are income statements, retained earnings, balance sheets, and statement of cash flows.
Income statements show revenues and expenses. It lets the company know if it has a financial loss or gain in revenue for a specific time period. A retained earnings statement is a summary in the changes of retained earnings for a certain period of time and provides information as to why the increase or decrease occurred. Balance sheets record transactions balancing assets and liabilities to come up with the stockholder’s equity of a company for specific dates.
On a balance sheet the asset side is exactly balanced by the other side consisting, of liabilities and net worth (Hendrickson, 2007). A statement of cash flow is another record given for a specific time period. It gives detailed information of the money coming into a business and where it comes from, shows what outgoing cash is being spent on and who the cash is being paid out to, and how much money is gained, left, or lost during the specific time period recorded.
Although the different financial statements are used for different purposes, they are interrelated. Often the people analyzing financial statements need to look at more than one to understand the overall financial standing of a company. They utilize many of the same information differently to come up with different aspects of the company’s financial standing. For example, the retained earnings statement has information from the income statement sheet and its information is used for the balance statement sheet.
Possessing four different ways the financial information is broken down makes it easier for different people to focus on the financial information, which is most important to them. Prospective investors and creditors may use income statements and retained earnings statement to decide whether to invest or conduct business with the company. Owners and managers may use balance sheets and income sheets to make business decisions including staffing, ordering supplies, expansion, and continued business.
Government entities use financial statements to ensure accuracy of taxes the company is required to pay. Accounting is an essential part of business. Companies hire accountants to identify, record, and communicate financial information to be analyzed and interpreted so sound economic business decisions can be made. Accountants record the information on four different financial statements used to give different financial aspects of the company making it more user friendly to those looking only for specific financial information about the company.