In any business, there exist countless transactions . One can describe every transaction by its effects on equity, assets, and liabilities. Financial statements and transactions provide long and short-term information concerning funds that flow out and into a business (Arya, Fellingham & Schroeder, 2000). Additionally, they show the business’ general financial health. General entries and data that create a business’ daily bookkeeping represent transactions. Different examples of accounting transaction include making sales to a consumer, buying supplies for one’s business from his or her supplier, or requesting for a loan (Arya, Fellingham & Schroeder, 2000). However, financial statements include comprehensive compilations of the transactions that one enters into his or her ledger over some period.
In accounting, every transaction is part of an accounting equation. An individual can express his or her accounting equation as assets = liabilities + individual equity (Hampton, 2015). Accounting equation makes the basis of bookkeeping’s double entry. According to the equation, one’s assets can be calculated by subtracting his or her liabilities from the net worth of his or her business (Hampton, 2015). Therefore, the effect of accounting transactions in financial statements allows one to balance his or her entries, which represent losses and gains with relevant decreases and increases in one’s net worth.
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Describe the elements and purpose of each financial statement
The purchases and sales, which are the transactions that create a business’ daily economic action, make the details of the business’ financial equation. Either individual sales become direct assets, are paid immediately, or they are traced in financial statement receivable as assets, which are yet to be collected . Similarly, purchases need an entrepreneur to withdraw money from capital accounts. However, the funds spent are balanced by the assets or inventory that one acquires due to the acquisition .
Additionally, loss and profit statements trace the business’ purchases and sales over time. This provides a big picture of the many personal transactions, which go into the business’ accounting equation (Churyk & Stenka, 2014). An individual’s loss and profit statement tallies and lists every source of one’s income all through the time it covers. Additionally, it provides a cumulative image of every expenditure from the business. Subtracting the total of the business’ expenses from its total revenue allows one to calculate his or her profit. The profit makes the basis of the equity part of an accounting equation.
Discuss the components and use of financial analysis
A business’ balance sheet signifies a picture of the organization’s accounting equation at a given moment. The balance sheet is a financial statement, which shows how one’s company managed its losses and profit and translated them into equity, which an individual can document and list, or liabilities, which tangibly undermine one’s net worth. The section of assets in the balance sheet covers everything that a person owns, including equipment, inventory, cash, and accounts receivable (Hampton, 2015). The liabilities section includes everything the business or entrepreneur owes, including accounts receivable and outstanding debt. Comparing the two sides of the business’ balance sheet shows one’s accounting equation, as his or her equity is signified by his or her liabilities deducted from his or her assets.
References
Arya, A., Fellingham, J., & Schroeder, D. (2000). Estimating Transactions Given Balance Sheets and an Income Statement. Issues in Accounting Education , 15 (3), 393-411.
Churyk, N., & Stenka, R. (2014). Accounting for complex investment transactions. Journal of Accounting Education , 32 (4), 58-70.
Hampton, C. (2015). Estimating and Reporting Structural Equation Models with Behavioral Accounting Data. Behavioral Research in Accounting , 27 (2), 1-34.
