Accounting is a universal language of economic activity in market conditions. A more comprehensive general and international definition of accounting would be: ‘accounting is the science of recording and classifying business transactions and events. It records and classifies the primary financial character and skills of preparation of significant reports, analyses and interpretations of these transactions and events and communicates the results to persons who can make decisions or give evaluation.’

There are two basic types of accounting. The first is financial accounting, or external accounting and the second is management accounting, or internal accounting. Financial accounting is our focus here.  It is methodologically based on double-entry bookkeeping, and deals with the chronological records of the general ledger accounts (account sheet and income statement) of all the actual business transactions. Financial accounting meets the need for information by the primarily external users of accounting information (owners, regulators, tax authorities, chambers, statistics, banks etc.) This is its primary purpose. For example, if a company wants a bank loan, it is necessary for the company to show its financial statements.

Types of financial statements

There are five different types of financial statements:

  1. Balance Sheet

The balance sheet contains fixed and current assets, long-term and short-term liabilities, and shareholders' equity of the company

  1. Income Statement

The income statement contains recognized expenses, revenue, and results achieved in a given reporting period

  1. Cash Flow Statement

Compiled with the aim to provide users of the financial statements with information about the sources of cash and how they are used, there are three different activities: operating, investment, and financial activities

Cash flow arising from operating activities includes cash receipts from sales, royalties, fees, commissions and other income, and cash payments to suppliers and employees, and records of receiving or issuing cash to or from insurance companies, payment or refund of taxes, and receiving or issuing miscellaneous cash.

Cash flows from investment activities include cash payments to acquire property, to acquire participation in capital ventures, for plants and equipment, and for future contracts etc. Cash receipts are needed from sales of property, plants, and equipment, sales of interests in joint ventures, and from miscellaneous cash payments

Cash flows from financial activities include: cash inflows from the sale of shares issued, cash payments to owners of shares; cash inflows from issuing and selling short-term and long-term securities, cash payments for the repayment of borrowed funds and the payment of cash to settle obligations under the lease

  1. Statement of Changes in Equity
  • Changes in capital due to the additional capital investment or withdrawal by the owner
  • Changes in equity due to the realization of revenues and expenditures
  • Changes in equity resulting from the distribution of profit or covering of loss
  • Changes in equity resulting from overvaluation of assets that are measured at fair value
  • Changes in equity arising from the recognition of the effects of changes in accounting policies and correction of material errors
  1. Notes to the financial statements

Notes provide information about the basis of preparation of the financial statements and specific accounting policies. They provide the information required under IFRS which is not shown in any of the financial statements, and provide additional information that is not presented in the financial statements, if they are relevant to their function.

 

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