Accounting and the Four Basic Accounting Statements
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...
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