Financial information is required for financial planning analysis and decision - making. Accounting system of a firm is the main source of financial information. The accounting system helps to accumulate, measure, and communicate financial information to various users for making economic decisions. The users of financial information include owners, creditors, manager’s employee’s customers’ suppliers’, govt. and society.
The financial statements - balance sheet and profit and loss account - are the basic instruments of an accounting system to communicate financial information to user.
Balance sheet shows the financial condition or the state of the firm at a particular point of time. More specifically balance sheet contains detailed information about the firm’s assets and liabilities. Assets represent economic resources possessed by the firm.
Fixed assets are used in business for more than accounting period of one year while current assets are converted into cash within an accounting period.
Liabilities are amounts payable by the firm. Liabilities payable with in accounting period are called current liabilities and those payable after a year or so are called long-term liabilities.
Funds contributed by the owners to the firm are called owners’ equity. Thus balance sheet gives a concise summary of the firm’s resources and obligation and measures the firm’s liquidity and solvency.
The profit and loss account (or Income Statement) shows the profitability of the firm by giving details about revenues and expenses.
Revenues are benefits, which customers contribute to the firm in goods or services provided by the firm. The cost of the economic resources used in providing goods or service to the customers is called expense.
Profit is the difference between revenue and expenses. Thus the basic purpose of the profit and loss account is to provide a concise summary of the firm’s revenues and expenses during a period of time and measure its profitability.
It should be noted that the accountant’s concept of profit is different from that of the economist. The computation of accounting profit is affected by the arbitrary allocation of expenditures between revenue expenditures (expired cost) and capital expenditure (unexpired cost).
Price level changes also complicate the measurement of the accounting profit. In economic sense, profit means net increase in the owners’ wealth viz. cash flow plus change in the value of the firm’s asset. In decision-making situation, the financial manager needs to focus on cash flows ands economic definition of profit.
The financial statements - balance sheet and profit and loss account - are the basic instruments of an accounting system to communicate financial information to user.
Balance sheet shows the financial condition or the state of the firm at a particular point of time. More specifically balance sheet contains detailed information about the firm’s assets and liabilities. Assets represent economic resources possessed by the firm.
Fixed assets are used in business for more than accounting period of one year while current assets are converted into cash within an accounting period.
Liabilities are amounts payable by the firm. Liabilities payable with in accounting period are called current liabilities and those payable after a year or so are called long-term liabilities.
Funds contributed by the owners to the firm are called owners’ equity. Thus balance sheet gives a concise summary of the firm’s resources and obligation and measures the firm’s liquidity and solvency.
The profit and loss account (or Income Statement) shows the profitability of the firm by giving details about revenues and expenses.
Revenues are benefits, which customers contribute to the firm in goods or services provided by the firm. The cost of the economic resources used in providing goods or service to the customers is called expense.
Profit is the difference between revenue and expenses. Thus the basic purpose of the profit and loss account is to provide a concise summary of the firm’s revenues and expenses during a period of time and measure its profitability.
It should be noted that the accountant’s concept of profit is different from that of the economist. The computation of accounting profit is affected by the arbitrary allocation of expenditures between revenue expenditures (expired cost) and capital expenditure (unexpired cost).
Price level changes also complicate the measurement of the accounting profit. In economic sense, profit means net increase in the owners’ wealth viz. cash flow plus change in the value of the firm’s asset. In decision-making situation, the financial manager needs to focus on cash flows ands economic definition of profit.