ACCOUNTING EQUATION
The accounting equation is the foundation or basic of accounting systems. The equation maintain for all transactions and business activities. Every asset that the company hold is always equal to the liabilities and equity. Therefore, the accounting equation is : ASSETS = LIABILITIES + EQUITY. For example, when we start a company, we must take a loan from investors or any of the institutions. Now, we take a look at each accounting equation starting with the asset. Asset are the resources for running the business work. As a business, if get more assets it means that the business is powerful. Asset also be divided into two categories which is non-current assets and current assets. Non-current assets are long-term use for
…show more content…
This shows the total balance of credits and debits are equality after the temporary accounts had being zero and didn’t list on the post-closing trial balance. This is the end of accounting cycle and it will start again with the first step in the next accounting …show more content…
These accounting information are so much important for the business owner or financial statements reader to analyze the company and make the economics decision.
Each type of financial statement has their own objectives and purposes. Below has shown the purposes of each financial statement:
a. Statement of the financial position.
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.
( ABFA1013 IA (student) 201718.zip )
b. Statement of profit or loss.
The statement of profit or loss is also known as income statement and it’s equation is revenue minus expenses equals profit or loss. The statement of profit or loss summarize the revenues and expenses of a business and also shown the ability of a business to generated business. The total profit or loss that generated in an organization during an accounting period can be seen through the income statement. For example, if the expenses of the company are higher than revenues, the company will get a loss in the business. However, the company will generate a profit when the revenues are greater than the
The Assets consists of: Current assets are highly liquid (cash, receivables, and inventories), Fixed assets can be capital-intensive assets which are permanent, and other assets can be intangible (patents, copyrights, and goodwill).
This statement is used to report cash payments and cash receipts of an organization’s during a certain period. During 2015, the Group had operating free cash flow amounting to 606 million euros, versus a negative 164 million euros a year earlier (Air france-klm group, 2016). The statement displays the relationship of the net income to the changes in the cash balances. It is important to understand that cash balances can wane despite and increase in net revenue or vice versa Horngren, 2014, p. 674). The statement also aids in the evaluating management’s use of cash and management’s generation, defining a company’s capability to pay dividends and interest to pay debts when the time comes to pay them, and forecasting upcoming cash flows (Horngren, 2014, p. 674).
The income statement summarizes all the income made as well as expenses paid during any given period. By observing the difference between your income and expenditures you are able to determine if a net profit has been made or a net loss has been incurred. The cash flow statement breaks down the incoming and outgoing flow of cash, summarizes its uses, and is categorized as either an operating, investing, or financing activity. These categories differ in the fact that operating activities are recurring, but investing and financing activities are not as frequent. The balance sheet catalogs your assets, liabilities, and equity.
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.
Accounting analysis refers to the accounting information provided by accounting, the application of certain analytical methods, the business process and its business results of quantitative and qualitative analysis. The result of accounting analysis is the main basis for accounting forecasting and accounting examination.
The Accounting Equation also called the balance sheet equation is the most basic principle used in accounting. It relates to three categories of accounts, assets, liabilities and owner’s equity. It states that during the period, the value of assets a business owns is
In the above cited the accounting of business is use to record and measure the size of the business, in terms of gains and loss on monthly, quarterly Semi- Annual and Annual basis. Use of the accounting in business, gives a clear review of net income, helps to plan budget of the business accordingly.
Accounting dates back as far as first centuries, is the language of business. As everything has gone through many changes, accounting has also changed many times through out the centuries. It went from the use of abacus to the most advanced softwares, and computers. With these drastic improvements nowadays accounting, financial accounting and management are facing big challenges. From the presentation of the reports to communication to the users, investors, and owners, the accounting field has gained totally a new shape from two decades ago. Today with the dynamic change in every aspect of life, the accounting field has to act fast and be able to adapt these new changes and challenges in order to survive.
The accounting equation is the basis which the double entry accounting system is constructed. The format of the accounting equation is assets equals to liabilities plus owner’s equity. Assets are the resources that in a company have available for use there are two types of asset which is current asset and noncurrent asset. Current asset is less than one year such as cash, bank and so on. Noncurrent asset is the asset is more than a year like building and motor vehicle. While, liabilities is accounts payable that are owed to suppliers and as a variety of accrued liabilities, such as debt payable to lenders. Owner’s equity is investors paid the amount to the company, actually is their initial investment plus the net income and minus the withdrawals from the business. Accounting equation important because it's always true and it forms the basis for all accounting
The accounting cycle is a series of steps starting with recording business transactions and leading up to the preparation of financial statements. This financial process demonstrates the purpose of financial accounting–to create useful financial information in the form of general-purpose financial statements. In other words, the sole purpose of recording transactions and keeping track of expenses and revenues is turn this data into meaning financial information by presenting it in the form of a balance sheet, income statement, statement of owner’s equity, and statement of cash flows.
Accounting aids the government and organisations in decision making for their financial stability. This numerical data helps solve real life problems and contributes to how the economy and businesses perform.
The resource of a business that owner own are called assets for example building, machinery etc. In other words we can say the thing that owned by a person a regard to company and having value, commitment and legacies.
But, what really is accounting? There won’t be enough space to write all the things that explains accounting. Instead it can be written as the action or process of keeping financial accounts. The American Accounting Association defines it as "the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information."
Assets are those things that are owned by an organization which have future economic value that are measurable and expressed in terms of monetary value. Basically assets are those resources which are acquired by a company through various transactions. (accounting coach, 2016)
Financial statements are intended to be understandable by readers who have "a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently."