Business documents

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Accounting provides information through the maintenance of files of data, analysis and interpretation of these data and the preparation of various kinds of reports. These reports are called financial statements. Four financial statements will be discussed: the balance sheet, the income statement, the statement of owner’s equity and the statement of cash flow.

Balance sheet. A balance sheet describes the resources that are under a company’s control on a specified date and indicates where these resources come from. Any balance sheet consists of three major sections: (1) the assets: material values and money resources owned by the company; (2) the liabilities: the funds that have been provided by outside lenders and other creditors in exchange for the company’s promise to make payments or to provide services in the future; and (3) the owner’s equity: the funds that have been provided by the company’s owners or on their behalf. The balance sheet lists all the assets, liabilities and owners’ equity at a point in time, usually the end of a month or a year. The balance sheet is like a snapshot of the company. For this reason, it is also called the statement of financial position. A balance sheet is made up of two lists, placed side by side. The list of assets (on the left) shows the forms in which the company’s resources are kept; the lists of liabilities and the owners’ equity (on the right) indicate where these same resources have come from. The lists end up being exactly equal.

One key to understanding the accounting transactions of a business is to understand the relationship of its assets, liabilities, and owners’ equity. This is often represented by the fundamental accounting equation: assets equal liabilities plus owners’ equity.

Assets = Liabilities + Owners’ Equity.

Income statement. The company’s success is measured by the amount of profit it earns. Net income is the accountant’s term for the amount of profit that is reported for a particular time period. The company’s income statement for a period of time shows how the net income for that period was derived. It also shows the expenses of the period: the assets that were consumed while the revenues were being created. The expenses are usually broken down into several categories indicating what the assets were used for. The income statement, also called the statement of operations, is like a moving picture of the company’s operations during the period. If expenses exceed revenues, the result is a net loss for the period.

The statement of owner’s equity. This document presents a summary of the changes that occurred in the owner’s equity of the company during a specific time period, such as a month or a year. Increases in owner’s equity arise from investments by the owner and net income earned during the period. Decreases result from withdrawals by the owner and a net loss for the period.

Cash flow statement. This measures the actual flow of funds –real money- flowing into and out of a company during a given period of time. Cash flows result from three major groups of activities: operating activities, investing activities and financing activities.

Good record keeping is not only wise but is required by law. Legal and financial questions may be raised by various agencies, banks and employees. The questions may be accurately answered when written records of business proceedings are kept. By recording daily transactions, the owner can learn from mistakes and avoid errors in future. Even if profits are not distributed to shareholders, any organization needs business documents to account for its activities to see whether it is being efficiently and honestly run.