As civilization developed throughout centuries, so did trade and commerce. And with the development of trade and commerce, bookkeeping became an integral part of every business. For the business to flourish, it must keep track of its finances to understand its performance. The foundation of this record-keeping is accounting reports. Monitoring a business’s financial performance is essential. In order to organize its invoices, oversee business transactions and ensure that legal accounting standards are being met.
Accounting reports, or financial statements, are statements of a company that represent the finances of the company at a particular moment in time, or over a certain time period. By compiling the records of all financial transactions of the business. They essentially present a summary of a business’s financial performance.
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What Accounting Reports Mean To A Business
The Purpose of Accounting Reports
An accounting report can be used to provide information and details about the financial position, cash flows and the operations of a business. This information is used by legal and government agencies to verify the transparency of an organization. This information is crucial to several parties to make decisions regarding the business. It allows lenders such as banks to determine whether to extend credit to a business or limit the amount of credit extended. In other words, it tells whether to validate loans for a particular company.
It also tells an investor whether to invest in a particular company and if so, how much. The information is also useful to acquirers, who can then decide the price he’s willing to pay to buy the company, should he choose to buy it. Accounting reports can be of value even to workers’ unions. Who can then dictate their wages based on the company’s apparent to pay, a piece of information gained from financial reports?
Types of Accounting Reports
There are primarily four types of accounting reports used by the business:
The Balance Sheet
The balance sheet also called the statement of financial position. It is used to show a business’s financial state at a fixed position in time. It shows all of a business’s assets, liabilities, and equity at the end of the period of time. Assets consist of all the resources that are owned by a business that has a monetary value. This includes but is not limited to land, cars, all forms of money, office space, furniture, machinery, etc.
On the other hand, liabilities gives information about what the business owes to other entities. These include credit purchases, overdrafts, loans, interests payable, and taxes payable. Equities, also often referred to as capital. It can be found by deducting liabilities from the assets. Equity comprises of share capital, stock, earnings, and accumulation of all forms of other income.
A balance sheet informs the reader about the current status of the business at a particular date within the accounting period. The information in the balance sheet is to estimate the debt position, funding, and liquid of an organization.
The Income Statement
The income statement is an accounting report that tells about a business’s profit or loss earned over a certain period of time, calculated from its expenses and revenues. Revenues refer to all the money collected from sales of a good or service by the business over a time period. Whereas expenses refer to the costs incurred due to operation, management, and sales over that period. By subtracting the business’s expenses from its revenues. A business would be able to determine whether it stands at a net profit or net loss.
The purpose of the income statement is to inform the reader about the ability of a company to generate a profit. It also tells readers about the sales made by the company and the various types of expenses it deals with.
Statements of Change in Equity
Statements of change in equity is another type of report used by bookkeepers to show the movement in equity and highlight the shareholder contribution. It also points out the equity balance at the end of the accounting period. Classifications of share capital, dividend payments and retain earnings are some of the information that is represented by this report.
Statement of Cash Flow
Like the income statement, the statement of cash flow also represents an accounting period rather than a fixed point in time. In this period, it illustrates the movement of cash flow in and out of a business or organization. A statement of cash flow consists of 3 sections. They are cash flow due to operation, cash flow due to investment, and cash flow due to financial activities.
The statement of cash flow shows the nature of the cash receipts and cash disbursements for stakeholders to form opinions about the business and make decisions.
Whilst we see that the accounting reports generated by a business do provide us with a lot of information. This is not to say that they are without limitations. For instance, accounting reports are often limited to quantitative aspects of business i.e. all parts of the business that can represent in terms of money. However, the business may have qualitative aspects that are ignored, such as the employment of well-qualified and motivated human workers, or customer satisfaction.
Also, a significant amount of time and money is spent in preparing reports. Which may limit the business’s ability to make investments. The information might become redundant or there might be updates in the policies by the time a report is done preparing. In addition, the use of different accounting methods may create a discrepancy between different reports and limit their comparability. Also, limited data and incompetency of accountants preparing the report may bias the information represented in the report.
In conclusion, it is seen that accounting reports can be the most useful tools for a business to use and make financial decisions. However, it is important to note that accounting reports are just tools for a business to use. In the end, they are severed by numerous limitations. It depends on the person reading the information to decide wisely how to use it.