According to Zimmerman (2016), “an accounting system is very much a part of the fabric that helps hold the organization together” (p.4). Why? Because it provides the business with the information necessary to make sound business decisions. Such decisions are, what is the business’ net worth, unusual expense categories and opportunities to reduce costs, how are resources being used, among many others. A good internal accounting system must enable managers to measure the business performance on a regular basis. The internal reporting derived from the accounting system provides for cost management and strategic planning. Furthermore, it enables potential investors to obtain a clear picture of the financial condition of a business for investment purposes.
One of the most common financial reports in a company is the Balance Sheet report. This report reflects the company’s assets, liabilities and equity. The assets present all the tangible and intangible possessions of the business, the liabilities reflect all its legal obligations or in other words, amounts owed to lenders and suppliers. Then, the equity section is defined as the difference between assets and liabilities, such as paid in capital, owner’s draw and shareholder’s equity.
The Profit and Loss statement which basically contains the revenues and expenses of the company resulting in a net income or loss. The revenues make up the inflows received from delivering or producing goods, providing services, or other activities which are part of the main purpose of the entity.
The expenses comprise the outflows due to the use of resources incurred from delivering or producing the goods and services of the entity.
The Cash Flow statement reports a company’s sources and uses of cash during a period. The purpose of this statement is to expose the changes in a company’s cash and cash equivalents. This report” reports cash receipts, cash payments, and net change in cash resulting from a company’s operating, investing, and financing activities during a period” (Kieso et al., 2010).
How would you describe your accounting system and financial reporting? Are they meeting the needs of your organization to help you run and grow your business?
Zimmerman, Jerold; Zimmerman, Jerold. Accounting for Decision Making and Control (Pa