Running head: FINANCIAL ACCOUNTING

Financial accounting

Name

Institution
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The accounting knowledge plays a vital role in controlling the finance of the business.

The business owner requires accounting knowledge and skills to run a business successfully

including proper management of finances. Several aspects of accounting affect the success of the

business. The owner of the business will use the accounting knowledge to find the most suitable

way of running a business. The accounting knowledge helps the business owner to know when

they are making loss or profits. The cash flow shortages can be predicted and the slow paying

customers can be easily get tracked. The knowledge of accounting allows accurate reporting of

transactions of the business, updated reports on accounting fee and payment, easier access to the

financial statements, minimize problems with the tax authorities and IRS and provides an

excellent tool for management (Rana & Jacobs, 2018).

The basic structures of assets stockholders equity and liabilities are as discussed below.

Assets refers to valuable used and owned by an entity, which the entity benefits from its

usage in income generation that are easily converted to cash. The balance sheet contains records

of assets. Assets are divided into several categories from the accounting perspective. We have

current assets (account receivable, cash, and other liquid items), prepaid and deferred assets

(prepaid rent, repaid insurance and other expenditures for future costs), long term assets

(equipment, plant and real estate) and intangible assets (patents, goodwill, trademark, and

copyrights)

Liabilities are obligations for company or individual that are legally binding to settle

future debts for payment of assets or services to be performed in future which result from past

transactions (Udin, 2018). Liabilities are found on the balance sheet. The two perspectives o

liabilities are as follows. The current liabilities are expected to be offset the operating cycle or

within period of a year. Long term liabilities are satisfied after more than one year or beyond the
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operating cycle. Stockholders equity refers to claim from business owners to the business assets.

The stockholder equity remains after liabilities have been deducted from assets. The equity

capital could be donated capital, paid in capital, or retained earnings.

The relationship between assets, liabilities and stockholder’s equity.

Assets= stockholders equity + liabilities

The relationship indicated above shows the relationship between three main accounting

parts. The total of stockholders equity and liabilities is assets.

The basic financial statements

Income statement

The income statements shows the failure or the success from the operation of the

company after a period of time. The net income are useful to the financial users since it indicates

important information regarding the future /forecasted performance of the business. Investors

will sell or buy stocks depending on beliefs about the future performance of the company. The

income statement is used by creditors to forecast future earnings of the company. The net income

is calculated by subtracting the expenses from the net revenue: Net income = Revenue –

operating expenses. The total amount obtained from issuing of stock cannot be classified as

revenue and furthermore depends paid out cannot be stated as expenses.

Balance sheet

The balance sheet reports the claims on assets and assets (stockholder equity and

liabilities). Liabilities/claims on assets must balance with the assets thus assets = liabilities +

stockholders equity.

The cash flow statement reports cash receipt and cash payment information of the

business within a certain time period. The financial information indicates the company’s
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investing, operating, ad financing activities that will assist the users of the financial statements.

The statement of cash flow is important because they reveal what is really happening with the

resources of the company.

Retained earnings statement indicates the causes of changes in amounts of retained

earnings during a particular period of time. The period of the income statement and period of the

retained earnings statement is same. The difference is the beginning amount of the retained

earnings, and the business will sum the beginning retained earnings with the net income and less

the dividend paid out to finally have the total retained earnings during that period.

The difference between cash flow statement and net income

The net income indicates profits which may not be available as cash flow and hence it

cannot be spent. The update is done on income statement includes those of revenues and sales

immediately after the deal is done and such payments may be received later thus the profit

cannot be spent now. The cash flow statement is affected by cash outlay and inflow. For

example, during the purchase of the company truck, the cash flow statement will be affected by

the cash outlay and the truck will be classified as an asset in the balance sheet. The income

statement will be affected slowly from the truck depreciation and the income generated from the

usage of the truck (Brusca, 2018).

Closing statement

After the operating cycle, the temporary account balances are transferred to the retained

earnings statement and the income statement after the accounting period. The accounts are thus

reset to zero and will form part of the opening balances in the next accounting period. The

permanent accounts are closed form the temporary accounts because the permanent accounts

(owner’s capital equity, liabilities and assets) will form part of the beginning balance sin the next
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accounting period. After closure of the accounts, the balance are equated to zero. With the

beginning zero balances, the revenues and expenses will be easier to be tracked at the beginning

of each year or period. It also allows easier comparison form one year to the next.
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Reference

Brusca, I., Caperchione, E., Cohen, S., & Manes-Rossi, F. (2018). IPSAS, EPSAS and other

challenges in European public sector accounting and auditing. In The Palgrave

Handbook of Public Administration and Management in Europe (pp. 165-185). Palgrave

Macmillan, London.

Nallareddy, S., Sethuraman, M., & Venkatachalam, M. (2018). Earnings or Cash Flows: Which

is a better predictor of future cash flows?.

Rana, T., Hoque, Z., & Jacobs, K. (2018). Public sector reform implications for performance

measurement and risk management practice: insights from Australia. Public Money &

Management, 1-10.

Udin, N. M. (2018). Salaried Taxpayers’ Internal States and Assessment Performance Under

Self-Assessment System. Indian-Pacific Journal of Accounting and Finance, 2(2), 24-36.