In the contemporary business world, business organizations must maintain an accurate record of accounting transactions and accurate financial statements. In the accounting process, organizations must adhere to the standard approaches to sin maintenance of financial transactions. Accounting transactions encompass all business activities that directly affect the financial statements and the financial status of business organizations. The accounting transactions take several forms such as cash and credit sales to customers, cash receipt from customers after submission of an invoice, the purchase of movable and fixed assets, funds paid off from creditors, and suppliers' payment (Christensen et al., 2019). Accounting transactions play a significant role in determining the accuracy of an organization's financial statements. The accounting transactions need to be maintained accurately and comprehensively. The data obtained from the transactional transactions are analyzed and brought together in the organization's financial statements. In the instances where transactional transactions have errors, the errors can easily be transferred in the financial statements. The accuracy of the accounting transactions represents the accuracy of the organization's financial statements. Many business organizations use their financial statements to make critical business decisions. Availability of clear and accurate financial statements allows executive and organization managers to get proper business insights by viewing their accounting transactions.
Describe the elements and purpose of each financial statement.
The balance sheets comprise the following elements; assets, liabilities, and the organization's net worth or the shareholder's equity. Assets encompass the things owned by business organizations; they include tangibles such as machinery and intangibles such as patents and trademarks. The liabilities indicate the amount of money a business organization owes others. The net worth encompasses the amount of money a business organization is left with if it sells off its assets and pays off its liabilities. A balance sheet indicates the amount of money a business organization owes other people as well as what the organization owns over a specific time duration.
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The second category of financial statements is the income statements. This financial statement indicates the money a business organization has spent and made over a specified time duration. The income statement has various sales or revenue elements, the cost of goods sold, gross profit, business expenses such as marketing, promotion, and advertising, administrative and general expenses (Yu et al., 2018). The sales or revenue element indicates the sales or revenue obtained from selling an organization's goods, services, or assets. The cost of goods sold encompasses the direct costs associated with selling products in a business organization. The difference between the sales revenue and the costs of goods sold produces the gross profit.
The cash flow statements indicate the outflow and the inflow of cash within an organization. At any given point, business organizations need to have sufficient cash to pay for expenses and purchasing of assets. The various elements of cash flow statements include operating, investing, and financial activities.
Discuss the components and use of financial analysis.
The financial analysis enables business owners to evaluate their business organizations' performance, growth, and sustainability. Financial analysis is executed through a comprehensive analysis of an organization's financial statements, such as statements of cash flows, balance sheets, and income statements (Warren & Farmer, 2020). There are four essential financial analysis elements: revenues, profits, operating efficiency, capital efficiency, and solvency. The growth in revenue is obtained by the difference between last period's revenue and the current revenue. The profits are analyzed by determining the difference between the revenues obtained and the costs of goods sold. Operational efficiency measures how efficient an organization is in utilizing organizational resources. Inefficiency in operational efficiency results in reduced profits and reduced business growth.
References
Christensen, T. E., Cottrell, D. M., & Budd, C. J. (2019). Advanced financial accounting . McGraw-Hill.
Yu, T., Lin, Z., & Tang, Q. (2018). Blockchain: The introduction and its application in financial accounting. Journal of Corporate Accounting & Finance , 29 (4), 37-47.
Warren, C. S., & Farmer, A. (2020). Survey of accounting . Cengage Learning.
