Without proper documentation and procedures the business cannot function properly, also without it there will be confusion and misunderstanding between different stakeholders of the business. To avoid these problems accounting is essential. This paper will therefore concentrate on the usefulness of accounting and the advantage it gives to any business. Further it will also discuss 4 different financial reporting tools that are income statement, Retained earnings statement, balance sheet and statement of cash follows.
So what is accounting and what is its purpose, when it is used, what advantages a business can have by using accounting tools and techniques. All these questions come to mind when a person thinks about using accounting techniques and tools. According to the encyclopedia Accounting is a systematic recording, reporting and analysis of financial transactions of a business. All the transactions involving assets, expenses, liabilities, capital, etc are recorded for future reference (Investopedia, n. d. ). Listed before are the purposes of accounting,
• Recording of accounting transactions helps keep the track of the cash in hand, debtors, creditors, expenses, etc. • Accounting can be extended more to analysis the performance of the business • Control on business performance is necessary and it can be done once accounting tools and techniques are followed. • Accounting helps in producing other reports that can be used in assessing the performance of a business. Reporting the performance of the business is as necessary as recording the transactions of the business.
Reporting is significant because it helps the shareholders and stakeholders to analysis how the business is performing, how will it perform in the future and how much profit the business can give if the money is invested in it. A company produces many financial statements from which one is income statement. This statement summarizes all the revenues s and expenses (operating and administrative), taxes which the company has given to the government, interest expenses, dividends paid to the shareholders, interest paid for the liability. Lastly after all the calculation is done Net Profit /Loss are obtained.
Net profit/Loss denotes the total profit/loss the company has earned/incurred from its operations. If the amount at the end is in positive it denotes that the company has operated profitably and that the employees and management was effective throughout the year whereas a net loss will indicate employees and management inefficiency and a need to investigate what went wrong during the year(Investopedia ,n. d. ). Balance Sheet is another financial statement that has a lot of value in the eyes of the stakeholders. It shows Net Assets (Long and Current), Equity and Liability (Long and Current) of a company.
A small company will have small amounts in every accounts of the balance sheet as compare to a large company. Balance sheet is extremely important for Creditors because they are interested in how much liability the company already has and should they risk their money by giving credit to the company or not . Investors too study the balance sheet to find how much Cash, Account receivable, liability; Retained earning a company has that can be used for calculating the profit and risk of the business. It is also important to mention here that Net Profit from Income Statement is included in the balance sheet (InvestorWords.
com,n. d. ). It is important for any business to have a clear understanding of where the cash is coming from and where it is going throughout the year so proper planning can do to avoid liquidity issues. For this Statement of Cash Flow is made where one part of the Statement gives the summary of all the cash receipts the company receives and the other part gives the summary of all the cash payment the company has made to other entities. Statement of Cash Follow is useful for mangers because it allows them to keep track of cash and they can take appropriate actions if the chances of cash deficit are there.
Cash balance from the balance sheet is used in Statement of Cash flow (Virtual Advisor Interactive, n. d. ). Statement of Retained Earnings gives information on the changes occurring in the Retained earnings of the business. Changes can be due to many reasons such as withdrawal of money from the business, Net profit increasing the retained earnings, dividend paid from the retrained earning, etc. Statement of Retained earnings is interrelated to the income statement because it takes Net income figure and dividend paid from it, where as it provides information to the balance sheet.
Mainly Investors have interest in this Statement because it informs how much business the business has retained for future operations, expansions, etc (Investopedia, n. d. ). To conclude, Accounting is important because it records all transactions and that can used for future references where as the four financial statements are primary used to assess the performance and position of the business which helps managers, investors, creditors and employees in Effective decision making. References: Virtual Advisor Interactive. (n. d. ) Managing Your Cash Flow. Retrived on June 8, 2009 from http://www.
va-interactive. com/inbusiness/editorial/finance/ibt/cash_flow. html Investopedia. (n. d. ) Statement of Retained Earnings. Retrived on June 8, 2009 from http://www. investopedia. com/terms/s/statement-of-retained-earnings. asp Investopedia. (n. d. ) Income Statement. Retrived on June 8, 2009 from http://www. investopedia. com/terms/i/incomestatement. asp Investopedia. (n. d. ) Accounting. Retrived on June 8, 2009 from http://www. investopedia. com/terms/a/accounting. asp InvestorWords. com. (n. d. ) balance sheet. Retrived on June 8, 2009 from http://www. investorwords. com/397/balance_sheet. html