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The importance of accounting in a business
Role of accounting in business and society
The importance of accounting in a business
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Successful businesses require a significant amount knowledge in many subjects in order to be maintained. The owner of the business generally has most of the responsibilities and must be well versed in multiple fields of business. Accounting is essential to running a successful business because it allows business owners to remain organized and consistent. Accounting also provides business owners with an opportunity to share tangible information with their stockholders showing how profitable their business may or may not be.
Assets
Assets are defined as property owned by a person or company regarded as having value. Accounting refers to these properties as current assets. Currents assets are assets that a company expects to convert to cash or
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This includes things such as net loss and net income. Creditors and Financial users use net income because it can predict how well a company may or may not do in the future. Income statements also help investors decide what they want to do with their stock in the company based on previous and future performance. The net income equals to the revenues subtract the expenses: Net income = Revenues - Expenses. Retain Earnings Statement
The Retained Earnings Statement shows amounts and cause of changes in retained earnings during the period. The retained earnings for the month are calculated by taking the original amount in retained earnings adding net income and subtracting dividends. Knowing the ending balance in retained earnings is essential in preparing the balance
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The heading of a balance sheet must identify the company, the statement, and the date. Assets are listed first while liabilities and stock holders equity are listed after. When the balance sheet is complete assets must balance with the claims of assets.
Statement of Cash Flows
The statement of cash flows provides answers to questions such as: How was cash used during the period? Where did cash come from during the period? Some common things included in the statement of cash flow are the cash spent on operations, investing, and financing activities. Financial users are interested in the statement of cash flows because it allows them to see where most of the company's resources are going.
The difference between Net Income and Cash Flow statements
Many things that affect the cash flow of a business are not directly related to its income statement. For example, a company purchases a new set of computers; this expense affects the cash flow statement, but the balance sheet will refer to these newly purchased computers as an asset. It will start to be recorded on the income statement under accumulated depreciation of
B) assets are generally listed on the balance sheet at their historical cost, not their current value.
The purpose of an income statement is to report the revenue generated and the expenses incurred by a corporation for the past year. (Melicher, 2014) The gross revenue is the first item on the financial statement followed by several expenses and then the net revenue. One of the expenses a corporation incurs is the cost of goods sold, which is the amount of money it costs a corporation to produce or manufacture the items sold to generate a profit. The second expense on a financial statement is the cost of record keeping, preparing financial statements, advertising, and salaries grouped under the heading “Selling, general, marketing expenses”. The other expenses on an income statement are depreciation, interest expense, and the unavoidable income tax. (Melicher, 2014) Once all of these expenses haven been deducted from the gross revenue a company has an accurate depiction of their net
A cash flow statement is another tool that can help with financial decisions. Cash flows that are not regular can put on the statement, on certain months when they occur. This allows one to see the impact of cash flow timing more transparently. The cash flow budget makes risk
Among other things, when the FASB created the statement of cash flows a vital part, it permitted either the direct or indirect approach/method. However, if the direct approaches are picked, the FASB demands that it be helped by a schedule of the adjustments that make up earnings to cash on the condition that it’s used by operating activities. This particular schedule can be shown as either in the footnotes on the financial statement or on the cover of the statement. In addition, commonly allowed accounting principle ask for that under either approach or method cash figures paid out for things like taxes and interest must be made known
Financial controls can be useful to figure out performance problems or if the organization is on sound financial footing. Financial statements provide information used for financial control of an organization. There are two major financial statements, a balance sheet and an income statement. A balance sheet shows an organization’s financial position with keeping in mind assets and liabilities at a specific point in time. An income statement sums up a firm’s financial performance for a given time interval. The income statement shows revenues coming into the organization from all sources and subtracts all expenses, such as: goods sold, interest, taxes, and depreciation. A manager’s knowledge of their financial state can help them manage their employees more effectively and be able to see what needs to be done to create more revenue, which is the ultimate goal in business, making a
The accruals need to be added via adjusting entries so that the financial statements report these amounts. An accrual allows an entity to record expenses and revenues for which it expects to receive cash or expend cash respectively in a future reporting period. It holds specific meanings in accounting, where it can refer to accounts on a balance sheet that represent non-cash-based assets and liabilities used in accrual-based accounting. These types of accounts include accounts payable, accounts receivable, deferred tax liability, goodwill and future interest expense. It is nearly impossible to generate financial statements without using accruals, unless the cash basis of accounting is used. The term accrual also often used as an abbreviation for the terms accrued expense and accrued revenue that share the common name word, but they have the opposite economic or accounting
The Purpose of Financial Statements The financial statements of a business are used to provide information about the status of the business, set performance targets and impose restrictions on the managers of the firm as well as provide an easier method for financial planning. The financial statements consist of the Profit and Loss Account, Balance Sheet and the Cash Flow Statement. There are four areas of information, which we can collect from a company's financial statements. They are: Ÿ Profitability - This information comes from the Profit and Loss account. Were we can compare this year's profit with the previous years.
Preparing general-purpose financial statements; including the balance sheet, income statement, statement of retained earnings, and statement of cash flows; is the most important step in the accounting cycle because it represents the purpose of financial accounting.
The statement of cash flows reports a firm’s major cash inflows and outflows for a period. This statement provides useful information about a company’s ability to generate cash from operations, maintain and expand its operating capacity, meeting its financial obligations, and pay dividends. There are three types of activities to look at in this statement, which are cash flows from operating activities, investing activities, and financial activities (3, 2005).
The statement of the financial position is also known as balance sheet has shown the accounting equation, Assests = Liabilities + Equity. The statement of the financial position shows the current assets, liabilities and equity owned by a business during an accounting period.
Balance sheet-: Balance sheet is a statement at the book value of all of the assets and liabilities of a business or other organization present a particular date such as the end of the financial year. It is known as a balance sheet because it reflection accounting identity the components of the balance sheets. The balance sheet must follow the following formula:
Cash flow statements provide essential information to company owners, shareholders and investors and provide an overview of the status of cash flow at a given point in time. Cash flow management is an ongoing process that ties the forecasting of cash flow to strategic goals and objectives of an organization. The measurement of cash flow can be used for calculating other parameters that give information on a company 's value, liquidity or solvency, and situation. Without positive cash flow, a company cannot meet its financial obligations.
Accounting is a very important term to our modern society. It is the career for men and women who at the start have their eyes set on top positions in industry, management, government, and general business. Accounting is a basic need of every businessman, from the operator of a filling station to the government of the United States. It's so important to our society. None of the business organization can operate without is. They are there-somewhere-in every business. In small business, people use pen, ink and skill keep the records. In large business, modern accounting machines are used to operate. Men and women are directing these machines in the accounting process. Wise businessmen enter business must have some accounting knowledge.
Balance sheet is a financial statement which is widely used by accountants for businesses. Balance sheet is also known as the statement of financial position because it helps us to present company’s financial position at the end of a specified period. (fresh books, 2016)
"The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions."[Financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities and equity are directly related to an organization's financial position. Reported income and expenses are directly related to an organization's financial performance.