Accounting is the process of recording, classifying and summarising in a significant manner and in terms of money, transactions and events. It is the communicating of financial information about a business entity to users such as shareholders and managers. The communication is generally in the form of financial statements that show in monetary terms the economic resources under the control of management. The information has to be relevant and reliable. The failure or success of an organisation lies within the parameters of accounting as this discussion shall bring out. There are three main financial statements that play an important role in an organisation namely the statement of financial position commonly known as the balance sheet, cash flow statement and the trading profit and loss account. It is in accounting where ratios which are indicators of how financially healthy an organisation is, are calculated. These statements show the organisation’s performance in terms of profitability as well as the general management of cash flows. The statement of financial position or balance sheet is a statement that shows an organisation’s assets and liabilities. Assets are the resources that are owned by a business and liabilities refer to the total money an organisation owes for assets supplied to a business. Below is illustration of a balance sheet. BALANCE SHEET FOR BARONCILAH TRADINGS AS AT 31 DECEMBER 2009 |
Assets2009Liabilities and Shareholders’ Equity 2009 |
Current assetsCurrent Liabilities
Fixed assetsLong term Liabilities
Total AssetsxxxxxxxxTotal Liabilitiesxxxxxxxx
Assets are recorded on the left side of the statement and liabilities on the right side together with shareholders’ equity. An organisation’s current and fixed assets’ value should be equal to its current and long term liabilities and shareholders’ equity. This means that for every amount that is added to the liabilities’ side, an equal amount should be added to the assets’ side. For example, an organisation might get a loan from the bank to buy a piece of land. The loan is the liability and the land the asset. This means that the organisation has more assets as well as liabilities. A subtraction from liabilities may also be a subtraction from assets. For example, payment of a loan means a decrease in amount of money in the bank. Liabilities and assets must balance, hence showing how well an organisation is being run. The trading records of an organisation are recorded in the profit and loss account. It looks at how well the company has traded over the time period concerned. Its basis is on how much the company has earned from selling its goods and services and how much it has paid in expenses which include production costs and salaries. For example, a person who operates a flea market would include how much she got from selling clothes and shoes. She would also record the expenses she incurred which include transport and salaries. The difference between the amount earned from sales and expenses becomes the profit. If costs are more than sales, the company would be running at a loss. In addition, the cash flow statement also plays an important role in determining an organisation’s performance financially. It shows the movement of cash in a business which means that it can be used to...