The Role of Accounting on Business

Financial statements are the basic statements that summarize the financial activities of a business and are prepared by businesses to indicate the financial steadiness of the business to investors, creditors, and other external entities (McGraw-Hill Higher Education, 2009). The income statement is a representation of the revenues and expenses for a specific period of time in a business. Its purpose is to detail the revenues, expenses, and net income or loss. A net income is the result of revenues exceeding expenses and a net loss is the result of expenses exceeding revenues. The income statement does not include investment and withdrawal transactions between the owner and the business in measuring net income. The investment and withdrawal transactions of the owner are not included on the income statement when measuring net income (Weygandt, Kieso, and Kimmel, p. 23). The owner's equity statement summarizes the changes in owner's equity for the same time period that the income statement covers and indicates why the owner’s equity has increased or decreased during that time period. The data included in the owner’s equity statement is derived from the income statement. It shows the owner’s beginning equity, investments, net income or loss, and the drawings of the owner (Weygandt, Kieso, and Kimmel, p. 23). The purpose of the statement of cash flows is to provide information on the cash receipts and payments for a specific period of time. It reports the effects of a company’s operations, investing activities, financing activities, the increase or decrease of cash, and the total amount of cash at the end of the specified period (Weygandt, Kieso, and Kimmel, p. 24).
The cash flow statement shows the causes of the change in cash reported on the balance sheet.
The purpose of the balance sheet is to report the amount of assets, liabilities, and stockholders' equity at a particular point in time. A company’s assets must match up with the combined total of its liabilities