Accounting is needed to give information at strategic levels. Financial statements are written records that convey the business activities and the financial performance of a company.
1. The balance sheet presents in summary form, as of a specific date, the assets owned by the company, the liabilities owed by the company to its suppliers and to lenders who have provided funds for the business, and the accumulated funds the owners of the enterprise have invested and left with the business to cover its operating needs.
2. The income statement summarizes those transactions that produced revenue for the business as a result of selling its products (or its services) during a period and those transactions that resulted in expenses for the business. The difference between aggregate revenue and aggregate expenses during a specific period is the net income (or loss) the business earned, also called profit or “the bottom line.”
3. The statement of owners’ equity summarizes the major transactions during a specific period that affected the owners’ interests in the company, including the net income the enterprise earned and the amount of those earnings that the owners elected to distribute to themselves.
4. The statement of cash flows summarizes the sources of the company’s cash funds during the period and the uses the company made of those funds.
+1) Notes to the account (They provide further explanation to the above details in the statement).
The Balance Sheet
The purpose of a balance sheet is to present, as of a particular point in time, the kinds of resources available for use by the enterprise and the sources the company used to obtain those resources. Financial people refer to those resources as assets, and they refer to the two possible sources as equity (amounts provided by owners) and liabilities (amounts provided by creditors).
- Assets are tangible or intangible resources that can be measured in naira, which are owned by the company and can be expected to provide future economic benefits to the company.
- Liabilities are the naira measures of the company’s obligations to repay monies loaned to it, to pay for goods or services it has received, or to fulfill commitments it has made.
- Owners’ equity represents the naira measure of the owners’ investment in the company. Owners can invest directly in a company by exchanging cash or other assets for shares of stock, and they can invest indirectly by allowing the company to retain some of the earnings that would otherwise be paid out to them. The relationship between assets (A), liabilities (L), and owners’ equity (OE) is the foundation of accounting. This fundamental relationship is expressed mathematically as follows:
A = L + OE
It is important to maintain this concept firmly in mind: the assets of a company will always equal the sum of its liabilities and owners’ equity. The equation must balance, because in accounting, by definition, every resource has a source.
The basic accounting equation is the basis for the balance sheet: the balance sheet presents the company’s assets in contrast to its liabilities and owners’ equity.
In conclusion, a balance sheet is often described as a “snapshot of a company’s financial condition.