…There are four basic financial statements. Balance sheet; shows assets owned by the company and its liabilities (items owed to others). Income statement-list of revenues less expenses, to arrive at net income. Cash flow statement-a detailed cash activity report and finally, the statement of retained earnings; it shows changes in retained earnings. Net income increases retained earnings and net loss decreases it.
Now that you know what accounting is, let’s discuss the ways businesses present their financial information. There are three entity types: proprietorships-single owner, partnerships-two or more owners and corporations-one or more stockholders. Proprietorships generally are shops and other small establishments owned by a single individual. Partnerships are generally small to mid size firms, but in the case of law and accounting firms, they might be big multinational organizations. Corporations on the other hand are owned by the stockholders. One can become a partial owner of a corporation by simply buying company stock. In partnerships and corporations, owners usually do not have managerial responsibilities. One thing that all of them have in common is that, financial records of the owners and the company are maintained separately and can never be mixed with one another.
After reading this article, I hope you understand what accounting is, how it is used and what are some of the most important accounting tools that managers and small business owners can use to make better decisions. You can learn more about these concepts and blog with Dr. Wayne Label, CPA on his webstie or by emailing him.