Accounting is probably one of the most popular professions pursed by college students in today’s world. Businesses, large and small, can greatly benefit from the services an accountant provides and the information that arises as a result of the work an accountant performs. In the following paragraphs, we will discover just what the purpose of accounting is. We will identify for of the basic financial reports and how each of these reports is related to another. Finally, we will take a look at whom these financial reports are useful to and the reasons they are useful.
Accounting is defined as “the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results”, (Webster’s Ninth New Collegiate Dictionary, 1988). What this means is that the purpose of accounting is to identify a company’s events, record those events in chronological order, showing which accounts are impacted by each event, and then communicate/report this information to interested parties in the form of financial reports.
There are four basic financial reports that are typically used to report a business’ activities: Income statement, Retained earnings statement, Balance sheet, and Statement of cash flows. Each of these reports has a separate purpose, but is also interrelated.
The income statement results in the net income, or net loss, of a company by presenting the revenues first and then the expenses, over a specific time period. If the revenues are greater than the expenses, a net income is reported, if not, then a net loss is shown. The result of the income statement is transferred to the beginning balance of the retained earnings statement. Without this figure, the retained earnings statement cannot be completed.
The retained earnings statement summarizes the changes that affect the amount of earnings retained over a specific time