For instance, the four basic financial statements are balance sheet, income statement, retained earnings statement, and statement of cash flows. According to the text, they form the backbone of financial accounting. The balance sheet reports assets on hand at a specific point in time (Kimmel, 2010). Balance sheets reflect the value of the organization. Financial institutions utilize balance sheets to determine if the organization has the ability to repay a loan. The income statement reports the success or failure of the company’s operations for a period of time (Kimmel, 2010). The income statement also reflects the amount of revenue and expenses. Retained earnings statement reflects increases and decreases in earnings during a specific period. At the same time, statement of cash flows reflects the cash flows during the period from business activities-operating, investing, and financing (Kimmel, 2010).
However, when classifying transactions by using the rules of debits and credits a business have to consider the accounting equation, assets equal liabilities plus equity. Assets are anything owed by or to the business, liabilities are what the business owes someone else, and equity is anything that is left over after the business would subtract liabilities from assets. For every debit there must be an equal credit and for every credit there must be an equal debit. Debits and credits always have to balance out, which means what is equated on one side has to be equated on the other side of the balance sheet as well.
In addition, journal entry transactions relate to the practice of accounting by entering information from receipts, sales tickets, cash register tapes, invoices, and other data sources that show financial transactions. Business transactions should be recorded, so they can be presented in the journal in chronological order. In specialty, journal entry transactions are useful and help the business keep track of their inventory, purchases and expenses. (Accountinginfo.com)
Likewise, financial statements help investors and creditors predict future performance of the company. These statements help investors and creditors with analyzing past performance and current financial position. Analyzing a company’s past performance…