IntroductionThis paper will define the purpose of accounting and identify the four basic financial statements. These financial statements include, the income statement, retained earnings statement, balance sheet and statement of cash flows. This paper will further explain how these financial statements are related with each other and why they are useful to business managers, investors, creditors, and employees.
AccountingThe purpose of accounting is to identify, record and communicate the economic condition of a company for its internal and external audience. Internally, accounting is useful for reporting the financial condition of the company to all departments in a company including sales, human resources and operations. Accounting gives the various departments information they need to conduct their operations efficiently. Examples include the sales department understanding how much they can price their products or services, human resources understanding how much they can pay the employees and operations how much they can spend on various projects.
Executives and chairmen need to understand how they will make changes with the way the company operates.
External users include shareholders whom purchase stock in the company and creditors. Banks need to know what the financial condition of the company is and therefore, weigh the risks of loaning money. The accounting records of a company will help a bank understand exactly how profitable a company is, what their assets are worth and how stable a company is. Investors want to know how stable a company is before purchasing stock. Suppliers want to see the accounting information about a company to determine their risk in getting paid on time for supplying the goods and services to a company with credit terms.
Regulatory agencies such as the IRS want to see the accounting records of a company to ensure they are operating by strict government rules and properly reporting...