Purpose of Accounting in Business

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  • Topic: Income statement, Financial statements, Cash flow
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  • Published : April 15, 2013
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Describe the purpose of accounting for an organization
P1
* Purpose of Accounting in Business

The main aim of any business is to earn profits and also to remain solvent, i.e., it should have enough resources to pay its employees, creditors and to carry on with the day-to-day activities of the business. The main purpose of accounting system is to prepare financial statements, that will help the various external and internal parties of the business to appraise the profitability as well as the solvency of the business. The three main financial statements that are prepared for the purpose of accounting information are as follows.

Balance Sheet
A balance sheet is the most important financial statement of a company. The balance sheet contains the assets and liabilities of a company as well as the owner's equity, which is the difference between these two. Analysis of the balance sheet statement has many benefits such as asset management decisions are based on the balance sheet statement. Also, in order to raise finances for the company, most lenders first analyze the last three years balance sheet statements and take decisions accordingly. Thus, the purpose of accounting is to have a data ready which will be used by such external parties as investors and government organizations to take their decisions.

Statement of Cash Flows
Cash flow statement presents both the cash inflows and cash outflows of a company in a given period of time. Cash inflows are the revenues earned by a company in a specified period, cash outflows are the expenses incurred in the production process of the company. Statement of cash flow, thus, represents the liquid position of the company in a given time. Analysis of the cash flow statements is very essential for proper financial management of the organization. Thus, accounting should help the firm in managing its finances in a better way.

Profit and Loss Statement
It is also known as the income statement. Profit and loss...
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