Question

What are the outputs of the accounting cycle? Why are they important? Identify and explain the purpose of each financial statement, including how they are interrelated.

Answer 1

Accounting cycle

It is basically a process of recodrding the event into books of accounts. This is a multi tier process.

The final output of the process is Financial Statement.This is complete process is very important for any business.

(a) It helps in making summary of complete business at one screen.

(b) Manangement needs financial statements for making decision. Therefore it also helps in decision making process of the company.

(c) Financial statements of company is always refererred by third party before dealing with the organisation for evaluating the financial position of the company.

There are five tyoes of financial statements

(i) Balanace Sheet:- It shows the finacial position of a organisation at one point of time. How much assets they own ? how much debt they have?.

(ii) Income statement:- It is a statement shownig the operations of organisation during some specific period. Ultimate objective of every business is to earn profit. Income statements shows how much profit or loss business incurred during the period.

(iii) Cash Flow Statement:- This statement represents the flow of cash from any kind of activity in the business. There may be three types of activities (a) Operating cash flow (b) Investing cash flow (c) Financing cash flow.

(iv) Changes in equity:- Equity share holders are the owner of the company. This statement shows how much there capital changed during the period in the business.

(v) Notes to Accounts:- It is also integral part of financial statement. it includes the explaination required for the above statements.