Tovah Hunter: The Use Of The Accounting Equation System

The “financial statements are formal reports providing information on a company's financial position, cash inflows and outflows, and the results of operations” (Hermanson, p.22). There are four main components that make up a financial statement. The four parts are, balance sheet, income statements, cash flow and, statement of owner’s equity. The balance sheets role is to define the company’s assets liabilities and revenue of the business. The income statement shows the income within the company. Cash flow reviews the position of the company by cash payments and receipts. Lastly, the statement of owner’s equity shows the amount of earnings, stock and other capitals of people in the company. (Hermanson, p.34-35).

The accounting equation: Assets = Liabilities + Owner’s Equity. Assets are the resources of the company. Examples include cash, land, buildings, and equipment. Liabilities are “outsider claims”, the company’s obligations to creditors. Examples include accounts payable, notes payable, and income taxes payable. Owner’s Equity represents “insider claims” of the company or the owner’s share of the assets. If a business is keeping accurate records this equation should always be in balance.

investors, auditors, executives of the business, etc.) an overview of the financial results and condition of the company. The major financial statements that come out of the accounting cycle are income statements, balance sheets, Statement of cash flows and Statement of retained earnings. Income statements are considered the most important of all the financial statements since it presents the operating results of an entity , e.g. revenues, expenses, and profits/losses generated during the reporting period (Bragg, 2017). Balance sheets provide reports of assets, liabilities, and equity of the entity as of the reporting date and can be considered the second most important statement because it provides information/figures about the liquidity, as well as the capitalization of a company (Bragg, 2017). Statement of cash flows exhibits the cash inflows and outflows that occur during a reporting period, which provides a useful comparison to the income statement, particularly when the amount of profit or loss reported does not reflect cash flows encountered by the businesses (Bragg, 2017). Statement of retained earnings is the least used financial statement that provides information regarding changes in equity during the reporting period and can include information such as: sale or repurchase of stock, dividend payments, and changes caused by reported profits or losses. Statements of retained earnings are often

Each user of the financial statements interprets the information in a different manor. They use the information to determine their interactions with the organization. Management, investors, and employees use the same information from the financial statements but for different purposes. These four basic statements are the fundamentals of accounting which can be much more detail and complex. They do not need to be more complex for the users of the information; these basic statements have all the information needed to make

While inaccurate accounting can cause misleading information about the company, every successful company should develop an income statement and balance sheet when monitoring financial growth. Also, formulating a horizontal and ratio analysis creates an accurate trend of the company spending behavior and debt-to-ratio venerability. A balance sheet can be considered as the bloodline of the company, allowing a quick view of financial fluency which could be attractive to outside investors. Last but not least, the income statement presents a hard result of gains, liabilities, revenues and debt within a yearly

Separately, the balance sheet reports a company’s financial position while the income statement reports a company’s fiscal year profits and losses. The balance sheet measures a company’s financial position by reporting its assets, liabilities, and owner’s (shareholder’s) equity. The income statement measures a company’s financial performance by reporting its revenues, expenses, and net income/loss. When combined, they serve two vital purposes: (1) expand the accounting equation and (2) enable analysis using ratios to determine industry position or potential material misstatements. The increase or decrease in owner’s (shareholder’s) equity on the balance sheet is a direct result of the net

The accounting equation is, Assets are equal to Liabilities plus Stockholders’ Equity. Assets are resources owned by a business. Liabilities are the debts and obligations of the business. Liabilities represent claims of creditors on the assets of a business. Stockholders’ equity represents the claims of owners on the assets of the business. This equity is divided into two parts: common stock and retained earnings. The balance sheet reports assets and claims to assets at one specific point in time. Claims to assets are subdivided into two categories: claims of creditors and claims of owners. The accounting equation must always balance. Each transaction has a dual effect on the equation. As an example if an individual asset is increased,

A Balance Sheet is a snapshot of an organization’s assets, liabilities, and owners’ equity at any given time. It allows the stakeholder’s to see the company's financial condition, as well as, presenting what is owned and owed. Assets are the things that are owned, and are referred to as capital. Liabilities are the amounts owed to others. In order to get an accurate picture, one must look at the whole document, and make comparisons amongst different line items.

Financial statements are imperative for organizations to keep track of the overall performance and value of the company over a period of time. Furthermore, the financial statements are necessary for creditors and investors to evaluate a company’s financial performance. There are four primary financial statements which focus of different areas of the financial aspects. There are balance sheets, income statements, statements of retained earnings, and statement of cash flows. Each of these statements is an essential measure for the financial activities within a company.

1. the income statement, 2. the balance sheet and 3. the statement of cash flows). Financial statement analysis is applied both to historical data, which reflect the results of the past managerial decisions, and to forecasted data, which comprise the roadmap for the business’s future.

The other main financial statement is the Balance Sheet. What, exactly, is in balance on a Balance Sheet? Assets and equities are in balance. Recall that liabilities are also equities: the equities of the creditors of the business. So the equation in balance is: Total Assets = Total Equities, where the total equities include both creditor equities (liabilities)

In the world of accounting, there are four basic financial statements that are necessary to track finances. The four basic financial statements used in accounting day-to-day are the balance sheet, income statement, retained earnings statement, and the statement of cash flows. All of these statements are interrelated and would not function without the other. Most importantly each of the basic four financial statements is extremely important to both internal and external users to track assets, liabilities, expenses, and revenues.

Financial statements are a vital factor of any business organization; they show where a company’s money came from, where it went, and where it is now, according to Securities and Exchange Commission website (2008). In addition, four main financial statements consist of the balance sheet, income statement, cash flow statement, and statement

According to Gaspar (2014), accounting can be viewed as “the language of business” as it records, summarizes and reports the financial activities and events of a business. The information that is generated from accounting is used by people to make important decisions, such as managers, stockholders, potential investors, and creditors. The income statement, balance sheet, statement of retained earnings and statement of cash flows are the most important reports generated by the accounting information system.

The balance sheet provides information about the nature and amounts of investments in enterprise resources, obligations to enterprise creditors, and the owners’ equity in net enterprise resources. That information not only complements information about the components of income, but also contributes to financial reporting by providing a basis for (1) computing rates of return, (2) evaluating the capital structure of the enterprise, and (3) assessing the liquidity and financial flexibility of the enterprise.