Tag: analysis of financial statements

Financial statement analysis is used by internal and external stakeholders to evaluate business performance and value. Financial accounting calls for all companies to create a balance sheet, income statement, and cash flow statement which form the basis for financial statement analysis.

Every business transaction gives two affects because financial accounting is based on double entry system of accounting. 

Accounting equation is the foundation of double entry system of book-keeping. It displays that all the assets are either financed by borrowing money or paying from the shareholder's equity. The balance sheet being the complex version shows explain the equation very clearly and it shows that total assets is equal to total liability plus shareholder's equity. Hence, recording of all business transactions is based on accounting equation.

Accounting equation states that assets is equal to equity. Equity consists of liabilities and shareholder's capital. Hence, it is a formula .i.e. Assets = Equity.

Business transactions are events that have a monetary impact on the financial statements of an organization. When accounting for these transactions, numbers in two accounts are recorded, where the debit column is on the left side and the credit column id on the right side.

Every business transaction affects two accounts as accounting is based on double entry system of accounting. For every debit there will be a credit and vice versa. 

Cash exists as a company's most liquid asset. Purchasing office equipment for cash will reduce a company's assets (i.e. reduction in cash in hand). Since owner's equity equals assets minus liabilities, owner's equity will be reduced as a result of buying office equipment with cash.

There are mainly three types of account: Real, Personal and Nominal accounts. Personal accounts are classified into three subcategories: Natural, Artificial and Representative. Bills Receivable and Bills Payable are personal accounts. Both these accounts represent debtors and creditors of a particular entity. The rule of personal account is Debit the receiver, Credit the giver. Suppose when Bills Receivable is issued, its debited because that represents debtor from whom money is receivable. In a way the entity has given those debtors a benefit i.e. credit so as per the rule  Bills Receivable A/c is debited. Hence, bills receivable is a personal a/c.