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In: Business and Management

Submitted By lynetteb
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Week one’s reading talked about the four basic financial statements and how financial statements would be useful to external users. We also learned the rules of credits and debits. As a team, we have come together and discussed how these objectives relate to the practice of accounting and its uses in business.
The four basic financial statements are Balance Sheet, which includes a summary of a company's assets, liabilities, and shareholders equality at a specific point and time. The Balance Sheet show stock holders' what the company owes and owns. The Income Sheet measure a company’s financial performance over a specific accounting period and shows how the company incurs its revenues and expense through both operating and non- operating activities. Statement of cash flow is another financial statement, which provides information about an entity's cash receipts and cash payments during a period operating investing and financing activities. The Retained earnings statement shows a percentage of net earnings not paid out as dividends however retained by company to be reinvested in its core business or to pay debt. Creditors find financial statements to be useful for numerous reasons. One of the many reasons they are used is to see the assets and that cash available for the company. From a creditors perspective this is important because financial statements show if the company would be able to repay the line of credit they want to use. Investors want to see the financial statements because they will use these to decide if they want to invest more or invest in a new company. Having the investors reinvest will help the company grow and invest in new ways to deliver the product or service they are delivering. It is important for a company to keep the financial statements correct and accurate because the investors and the creditors look at them. Debits and credits are quite common when discussing accounting. Debits and credits, which are abbreviated as “dr” and “cr,” are unique accounting tools that describe the change in a certain account that when it is necessary by a business transaction. In other words, cash is described as credits or debits, instead of saying that cash is increased or decreased. They show what side of the T-account to put the number on. Debit indicates left whereas credits indicate right. A T-account is just a name for the shape that it creates when forming the diagram. When company’s input an account on the left side, it is called debiting the account and when a company inputs an account on the right side it is called crediting. Both the debit and the credit side balance each other out, if they do not equal out, there is something wrong. So when the debits and credits equal, this provides the basis for the double-entry system of recording transactions.
The way a company records its day- to- day transactions is crucial to its financial statements. Some companies use accrual-basis accounting, a cash-basis accounting or both forms of accounting to record their transactions. An accrual base system allows a company to record revenues and expenses that have not had actually cash either credited or debited from their account, but has been accrued through services or expenditures. A cash-basis accounting system is the time when a company only records revenues or expenses when the cash is either deposited or extracted from an account. A company has to ensure that no matter which system is being used, that for every credit there must be a debit. If the books are not balanced and carefully checked, one error can ruin the accuracy of a company’s financial statement. It is best practice always to keep a balance sheet to ensure that revenues or expenses are documented properly and accounted for.…...

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