Concerning the subject of accounting, we are speaking of the basic language of business. Accounting keeps the organizational flow of money in identifiable terms so that it can be properly understood and used for the good of the corporation. Along with defining the four basic financial statements, this paper will attempt to explain the relationship between those statements and how they are beneficial to all involved.
The primary purpose of accounting is to identify and annotate transactions that have a direct financial impact on the organization. These reports are usually based on a specified period, usually every four months to a year. The main intention of any firm is to earn profits and remain financially sound. Enough capital should be on hand to pay workers, creditors, and to keep the day-to-day functions of the business up and running. The reports are then made available to investors, creditors, and tax authorities. Economic decisions for a firm or corporation are based on the results of these reports.
Financial statements are records of monetary activity used primarily by accountants. These statements provide a financial overview of the short and long term condition of a corporation. There are four basic financial statements related to accounting, and are as follows: (1) Income Statement – this is also called a profit and loss statement, and reports on a firm’s income, expenses, and profits over a period of time. It also shows how much money was associated with earning that particular revenue. This information tells how much the firm gained or lost over the period. The income statement does not show when revenue is accumulated or expenses paid. It does show a profitability vision of what the firm may earn over the time covered. (2) Retained Earnings Statement – this explains the changes in a firms retained earnings over a particular period. This period would be the same amount of time covered by... [continues]
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