Impacts of Accounting
Introduction
An accounting transaction is a business occurrence that has a monetary impact on the financial statements of a business (Hermanson, 2018). A financial statement can also be regarded as a written record of the business financial situation. Financial statements include, balance sheets, income profit and loss statements and cashflow statements (Hermanson, 2018). Financial statements are essential in a business since they are the main means of communicating financial information. When designing financial statements, it is important to put into consideration the needs of diverse users, including the potential owners and creditors. According to the Financial Accounting Standards Board (FASB), the elements of a financial statement include; assets, liabilities, equity, revenue, expenses, gains, investment by owners, distribution to owners, losses and comprehensive income (Hermanson, 2018).
Assets are a major element of a financial statement; they are defined as the economic benefits that are obtained as a result of transactions that had been made in the past (Fazal, 2011). Comprehensive income occurs while there is a change in equity, comprehensive equity includes all the changes in equity that have taken place in a period. Distribution to owners is described as the decrease in net assets of a particular enterprise, distribution owners occur as a result of transferring assets, giving services and incurring liabilities (Fazal, 2011). This element is responsible for causing a decrease in ownership interest in a business.
Equity is described as the remaining interest in the assets after liabilities have been deducted. In businesses equity can be referred as the ownership interests (Fazal, 2011). Expenses are described as outflows of assets, or the cost that is incurred in a business while delivering or producing goods. Gains are simply an increase in equity or the net assets from a transaction. Liabilities are defined as an obligation the business has to pay for as a result of a past transaction (Fazal, 2011). Losses are a decrease in equity and lastly revenues are inflows of assets.
A financial analysis is an indicator of the financial state of an enterprise. Investors are in a position to utilize financial analysis to make informed decisions on investment. Financial analysis can also be utilized as a policy to support the preparation of long term and short-term business plans and objectives. A financial analysis has five key components; revenue, profit, operational efficiency, capital efficiency and solvency and liquidity (Hermanson, 2018). Revenue is the businesses main source of capital; revenue is responsible for determining the long-term success of a business. Growth, concentration and per employee revenue is an indicator of the amount of revenue that the employees of a business bring to the business. Revenue concentration indicates the amount each client brings to the business enterprise. If much of the revenue in the business comes from clients the business has a high possibility of failing or suffering a loss if the clients reduce or stop purchasing from the business.
For a business to maintain its longevity it is necessary to make profits, making profits is the main aim of businesses. A detailed overview of the profit margins of a business can assist in painting the financial picture and indicating the financial position of a business. There are three types of profits, gross profit, operating profit and net profit, each of these margins has a mathematical equation that utilizes information that is derived from financial statements (Periu, 2019). Profits are an indicator of the financial strength of the business, profits also determine if a business is able to pay the operating cost in the events of loss and subsequently be able to re-invest in the company.
Operational efficiency is responsible for measuring how business resources are being allocated and utilized (Periu, 2019). The absence of operational efficiency can be a major contributor to slow growth in business and reduced profits. Accounts receivable turnover measure how the business manages the credit that is extended to customers (Periu, 2019). A higher number of accounts receivables turnover is an indicator that the business is effectively managing credits. Inventory turnover, is reviewed to show how well the business manages its inventory, a higher number of inventory turnover is an indicator that the business is performing well while a lower number is an indicator that the business is not selling well or the production rate exceeds the business’ level of sales.
Capital efficiency and solvency is another element of a financial analysis the both of them are of interest to lenders and investors (Periu, 2019). Return on equity represents the returns the investors are generating from the business, debt on equity is an indicator of the amount of leverage the business is utilising to operate. Leverage has been known to vary but should not exceed an amount that is reasonable for the business (Periu, 2019). Liquidity analysis shows if the business has the ability to generate enough cash to cover for cash expenses. Current ratio in liquidity measures the business’ ability to settle short term obligations from the cash and current assets of the business. Interest coverage in liquidity measures how capable the business is when it comes to paying interest expense from the cash the business generates.
In conclusion, A financial statement is a written record of the business financial situation. A financial analysis is an indicator of the financial state and health of a business. Investors are in a position to utilize financial analysis to make decisions.
References
Fazal, H., (2011). What are the Elements of Financial Statements? Retrieved from; https://pakaccountants.com/what-elements-of-financial-statements/
Hermanson, R. H., Edwards, J. D., Maher, M., & Donelan-Knox, K. (2018). Accounting principles: A business perspective.
Periu,M., (2019). 5 Key Elements of a Financial Analysis. Retrieved from; https://www.americanexpress.com/en-us/business/trends-and insights/articles/financial-analysis-small-business-health/
