Accounting mainly involves analyzing, interpretation and reporting of business transaction records. Accounting provides information for decision making to the management. The purpose of accounting is to maintain proper control of finances of an organization. In other words, accounting is an information system whose purpose is to provide essential information about business financial activities. It is primarily involves design of record keeping system, summarized reports based on the recorded data and eventually interpretation of the reports.
(Duane and Charles 1991; Martin & Fernando 2002). Four basic financial statements are: Balance sheet: This records assets and liabilities as well as owner’s equity of a business entity. Assets include current assets such as cash, debtors, securities, and prepayments. Long term assets include land, machineries, plants, and furniture. On the T account liabilities are recorded on the right hand side. They include current liabilities and long term liabilities and owners equity. The first step towards preparing financial statement is recording the transactions in the journals.
Then the accountant will prepare ledger accounts for every item e. g. machinery, wages, furniture, cash accounts and so on. It is from these ledgers data to prepare the basic financial statement is derived from. The relationships Net income/loss reported in income statement forms part of owner’s equity items. If net loss results, it is deducted, if net income results then it is added (in the owner’s equity statement). Owner’s equity as at end of trading period from the owner’s equity statement is recorded in the balance sheet as owner’s capital.
Net cash reported in the cash flow statement is the cash reported in the balance sheet (Carl etal 2008) Users of financial Statement Financial statements are very useful to managers, investors, creditors, and employees. Managers need to know performance of the business in terms of profit, costs, liquidity, and solvency status so as they appropriately plan and make decisions for future. These statements also help them in budgeting and forecasting the performance. Investors are concerned about maximization of their wealth. These statements show the dividends and other incomes rewarded.
They can use the statements to judge potential earnings from the firm. Creditors offer credit facilities to a business. They use these statements to evaluate a business liquidity and solvency status so as they may be able to know ability of a business to meet its short term and long term liabilities. Employees are also concerned to know the performance of their employer. Good performance means continuation of their employment while poor performance is a threat to their employment. (Bhabatosh 2005) Objectives of financial reporting Financial reporting is to provide information for decision making.
It is also help in forecasting, budgeting, control. Financial reporting determines financial position of a business entity. It also shows income earned. Financial reporting is meant to be used by both internal and external users. Accounting principles, assumptions and constraints Accounting principles includes: cost principle; which state that assets and liabilities should be reported at acquisition cost rather than market cost, Revenue principle; state that revenue should be recorded when goods pass into the possession of the buyer (when realizable or earned.
Revenue should not be anticipated), matching principle; state that expenses should be matched with revenues accruing from a certain transaction, Disclosure principle; state that, any information that may affect decision making should be disclosed. (Jerry etal 2004). Assumptions includes: Going concern; a business entity is assumed to be continuing with operations indefinitely, Business entity; this state that business and the owners are separate entities, Time period; operations of a business entity can be divided into time periods, Monetary unit assumption; a stable currency as unit of account is assumed.
(Jerry etal 2004). Constraints includes: Objectivity principle; financial statement should be objective based on evidence, Materiality principle; any item that is likely to influence decision of the financial accounts user should be included, Consistency principle; accounting principles should be used be consistently. (Jerry etal 2004). Accounting equation; The accounting equation is: assets =liabilities + owners’ liabilities. Business transaction leading to increase in assets will affect assets side.
However this has to be funded by either owners or creditors. Meaning that, the equation will always be balanced. Conclusion Accounting reporting purpose is to provide information for decision making. Accounting standards by both international and national accounting bodies should be adhered to in financial reporting. Basic financial statements are balance sheet, cash flow statement, owners’ equity statement, and income statement. These statements are very useful to both internal and external users as far as decision making is concerned.
Reference Duane, R. , & Charles, S. (1991). The Essentials of Accounting 1. Research & Education Association. Martin, S. , & Fernando, A. (2002). Financial Statement Analysis: A Practitioner’s Guide. John Wiley and Sons. Bhabatosh, B. (2005). Financial Policy And Management Accounting 7th Ed. PHI learning Pvt. Ltd. Carl, S. , James, M. , & Jonathan, E. (2008) Accounting. Cengage Learning. Jerry J. , Donald, E. , Paul, D. , & Barbara, T (2004). Accounting Principles, Part 1. John Willey & Sons