Define the purpose of accounting and identify the four basic financial statements - Essay Example

In addition, that financial information varies from one user to another user as financial information plays a key role in making economic decisions. Four basic financial statements The four basic financial statements are: the statement of comprehensive income, the statement of financial position, the statement of changes in equity and the statement of cash flow, normally they are identified as income statement, balance sheet, statement of changes in equity and cash flow statement respectively.

The income statement is consisted of elements such as revenues, expenses; interest paid or received; administration and maintenance expenses. On the other hand, the balance sheet is made of two elements such as total assets and total liabilities and shareholders’ equity. On the one hand, total assets are made of current assets and fixed assets: And the current assets include cash, inventory and receivables, and the fixed assets include the machinery, equipment, furniture, and intangible assets such as goodwill.

On the other hand, the total liabilities and shareholders’ equity is made of short term and long term liabilities and shareholders’ equity, which includes, reserves, current year profit and so on. The examples of current liabilities include current year tax payable, interest payable and overdraft; and the long term liabilities include debentures, loan, and other credit instruments payable more than the period of one year. The statement of changes in equity accounts for any changes in the shareholders’ equity, reserves, and issued shares.

Or aggregately, any changes in the capital structure of a business will be reflected under the heading of the statement of changes in equity. The statement of cash flow represents the aggregate cash inflow and outflow on all items that a business uses to carry out its commercial activities. Any new purchase of machinery would be reflected as an outflow of cash as the cash is paid out to buy the machinery. Basically, the statement of cash flow is based on three activities- operating, investing and financing- where operating activities represent the core business activities that generate main cash inflows.

Investing activities reflect the supportive activities from where additional revenues may be generated by investing into other side businesses such as subsidiary or associate companies. Interlinked financial statements Accountants follow a systemic way to complete the cycle of financial statements. First, they prepare the statement of comprehensive income. In which, most of the time annual revenues and expenses are accounted for in a way to reflect a business performance in a given period of one year.

In a particular sequence, an accountant records annual revenues and subsequently, after deducting annual business related expenses, she reaches a financial figure of net revenue or net profit. After completing and reaching to this net profit, the accountant prepares the statement of financial position. And, she accounts for that net profit figure in the equity and liabilities section of the statement of financial position; where this net profit figure is adjusted with certain related changes.

Aggregately, without bringing that figure of net profit from the statement of