The accounting transactions refer to a business event that can influence the financial statements of the organization. The transactions are often recorded in the accounting books of a company. Accounting transactions can impact various aspects of the financial statements such as profit and loss, balance sheet and drawings. The transactions such as sales and purchase determine the profitability of the firm. As a result, they have an impact on the balance sheets of companies.
The transaction can also have an impact on the income statement of organizations. The transaction that involves the sales and purchase of assets can lead to either decrease or increase of the business net worth as determined by the financial statement ( Scott, 2015) . Other transaction such as withdrawals can also impact on the balance by decreasing the capital.
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Each transaction leads to the changes in accounting equations. Besides, each of the transactions done by a company has a double impact on the balance sheet, income statement and cash flow information. Ideally, every transaction forms a component of the accounting equation which is expressed as Assets = Liabilities + Owners Equity.
The Elements and Purpose of Each Financial Statement
The elements of the accounting statements are the grouping of items that are contained in the financial statements. The elements can include assets, liabilities, equity, revenue, and expenses. The assets refer to the items associated with economic benefit and are expected to earn some benefits in the future. The examples of assets include inventories, accounts receivable and fixed inventory. On the other hand, liabilities refer to the legal and binding obligations that are payable to another individuals or entity. The examples of the liabilities include accounts payable, wages payable, and taxes payable.
Equity refers to the amount of money invested in a firm by the shareholders or owners. It also included the remaining or retained earnings from the profit realized by the companies ( Brigham et al. 2016). It can also be described as the amount of capital invested by the company.
Revenue is entered into the income statement and refers to the increase or decrease in the liabilities of the company as a result of the provision of products to the customers. It can also refer to the quantification of the gross activity that is generated by the business. Normally, revenues come from events such as sales; interest and income the examples of revenue include service sales and product sales. Expenses are also entered into the balance sheet and refer to the reductions in the value of the organization’s assets since they are mainly used to generate revenue ( Weygandt et al., 2015) . The examples of expenses include compensation income, intense expense, and utility expense.
The most common types of the financial statement include the income statement, balance sheet and cash flow information and the statement of retained earnings. Although each of the financial statement can serve different purposes, the general purpose is to provide information regarding the results of various operations, the cash flow and financial position of a business. Based on the specific role of the financial statements, the income statement serves the purpose of informing the users regarding the ability of the firm to generate profit. It also gives the number of sales and nature of expenses. The income statement can be used analyze the trend in the financial performance and operations of companies.
The purpose of the balance sheet is to give information to the users regarding the current status of the firm as of the date indicated on the balance sheet. Such information is normally used to provide an estimation of the funding, liquidity, debt position and liquidity ratios.
Lastly, cash flow is used to show the nature of the disbursements and cash receipts of firms. The information regarding cash receipts and disbursement can be used to provide the performance of companies such as cash flow.
Components and Use of Financial Analysis
The components of financial analysis include operational efficiency, profit, capital efficiency and liquidity. Each of these components is used to perform different functions when conducting financial analysis. The analysis of profits can help provide information such as the financial health and profitability of companies. It determines aspects such as profit margin or net profit. Operational efficiency is the component that deals with how well an organization is using its resources and includes measures such as inventory turnover and account receivable turnover ( Warren & Jones, 2018) .
The other component of financial analysis which is capital efficiency and solvency is a measure that deals with elements return on equity and debt-equity ratio. The ratio is important to the majority of shareholders as it determines the reward that investors can receive from the shareholders.It can enable investors to make an informed investment decision to an organization.
The liquidity is another component of the financial analysis and addresses the ability of the company to generate the sufficient funds that can cover its expenses. The liquidity financial analysis can be achieved through the use of many ratios that include current ratio and quick ratio.
References
Brigham, E. F., Ehrhardt, M. C., Nason, R. R., & Gessaroli, J. (2016). Financial Managment: Theory And Practice, Canadian Edition . Nelson Education.
Scott, W. R. (2015). Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.
Warren, C. S., & Jones, J. (2018). Corporate financial accounting . Cengage Learning.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting . John Wiley & Sons.
