Any venture needs the accounts to monitor the organization’s performance. Accounting divides the available assets and processes of a firm and forms structured reports which are intended to analyze the company’s information for better results in the following timeframe, or to inform the other parties on the business’ health. The main documents of accounting are the balance sheet, which describes the structure of the assets, liabilities, and equity with their sorted subdivisions; the cash flow statement, which describes the efficacy of operating expenses, and inflows and outflows; the income statement, which provides the precise data on sales result.
The pillar of accounting, specifically evaluation of a company’s capital structure and returns, is a balance sheet. It is a statement that indicates a firm’s condition according to a basic equation Assets = Liabilities + Equity at a certain point in time (Cagan, 2017). The evaluation shows that the assets which a business owns are obtained either by borrowing from outside parties or by acquiring resources with the shareholders’ or the owners’ finances (Cagan, 2017). The statement can be structured either vertically (the elements are listed one after another: assets, then liabilities, then equity) or in a side-by-side format (assets on the right and liabilities with equity on the left), but it must contain the three elements mentioned above (Cagan, 2017). As it is seen, the balance sheet covers a company’s every asset as well as its source and can depict the assets structure.
Despite the simplicity of the equation and the basic formula, the balance sheet contains a variety of sub-elements that provide the full description of what a business owns or owes. Every element, assets, liabilities, and equity, has its own subdivisions. The main two classes of the assets are current assets and non-current assets (Gupta, 2016). An asset is considered current if it is intended for realization or consumption within the operating cycle of a firm, is initially kept for trading, is to be realized within a calendar year, or is in a form of cash and the equivalents (Gupta, 2016). These classes include cash, its equivalents, trade receivables, deposits, loans, and inventories (Gupta, 2016). Concerning non-current assets, they are considered so if they cannot be classified as current ones (Gupta, 2016). The assets of this class are not liquid, thus they cannot be transformed into cash within the operating cycle. Non-current assets provide facilities and capabilities for an enterprise’s production (Gupta, 2016). These assets are property plant and equipment, intangible assets, investment, and investment property (Gupta, 2016). The subdivision of the assets into classes offers a detailed view of the company’s owned resources and the structure of the assets.
While the balance sheet depicts the structure and resources of a firm’s assets, the cash flow statement provides essential data about cash in- and outflows. This statement allows analyzing the efficacy of cash usage, as well as the company’s rational functioning (Cagan, 2017). The cash flow statement covers a time frame identical to that of the statement of profit and loss and begins simultaneously with the cash balance of the period (Cagan, 2017). The statement has three categories: cash flows in operating activities, investing, and financing activities (Cagan, 2017). The operating activities include cash flows from the activities concerning the main activity of a business except for receipt of interest and dividend and payment of interest (Gupta, 2016). The investing activities are those concerning “capital expenditure, inter-corporate investments and acquisitions” (Gupta, 2016, p. 341). These activities include receipt of interest and dividend and disposal of non-current assets (Gupta, 2016). The financing activities include activities that transform the capital structure. Payment of interest and dividend are included in financial activities (Gupta, 2016). The properly structured cash flow statement can indicate the company’s ability to maintain cash transactions and show the rational usage of the funds at disposal.
The above statements describe the state of possessed assets and the cash flow productivity. Nevertheless, another major index of a business’ efficiency is income. The income statement provides the data on the financial performance results within an accounting period (Robinson, Henry, Pirie, Broihahn, & Cope, 2015). While there is no certain structure of the report, the main elements included in it are revenue, earnings per sale, and net income (Robinson et al., 2015). The income statement is widely used for calculating financial ratios, as they show the performance and costs which are the key aspects of a firm’s viability (Robinson et al., 2015). Thus, the income statement is one of the essential reports on the firm’s operating results.
In conclusion, the accounting tools simplify access to business data by properly structuring it. The main document relating to a company is the balance sheet, which covers the items that succumb to the equation Assets = Liabilities + Equity. It shows the structure alongside the sources of the company-owned assets. The assets are divided into current and non-current according to their purpose. The cash flow is another essential statement which covers a firm’s rationalism during operating, investing, and financing activity. Finally, the income statement describes the results of a company’s main purpose, creating profit. Altogether, these statements cover most of a firm’s useful data and, with a certain approach, can give the ultimate information about a business’ activity.
Cagan, M. (2017). Accounting 101: From calculating revenues and profits to determining assets and liabilities, an essential guide to accounting basics. Avon, MA: Adams Media.
Gupta, A. (2016). Financial accounting for management (5th ed.). Delhi, India: Pearson Education India.
Robinson, T. R., Henry, E., Pirie, W. L., Broihahn, M. A., & Cope, A. T. (2015). International Financial Statement Analysis (3rd ed.). Charlottesville, Virginia: CFA Institute.