Accounting is part of finance that studies the different items that reflect a company or entity’s economic and financial movements.
It is a crucial tool to know the situation and condition of a company and, with this documentation, to establish the necessary strategies to improve economic performance. For example, if we buy wood to make chairs, we need to record that purchase to know how much we have, how much it cost us, who the seller is, on what date we bought it, etc. Accounting takes care of all that. And more.
Accounting is a resource available to manage the expenses and income of a company. In the development of its activity, every company carries out purchase, sale, and financing operations. Due to these activities, its assets fluctuate, obtaining profits or losses.
All companies are aware that they need to manage accounting parameters properly. The so-called small and medium-sized enterprises (SMEs) and large multinational corporations are involved in this concept. Equally, this is due to financial reasons –ensuring a reasonable return – and tax regulations, which stem from pressure from federal, state, and local tax offices every time a company is formed.
Elements of Equity and Financial Statements
Within accounting, equity items and financial statements are two essential concepts on which the entire base is articulated.
The assets are:
- Active
- Passive
- Net worth
On the Other Hand, the Financial Statements Are:
- Balance or Situation
- Statement of Income
- Statement of Changes in Equity
- Cash Flow Statement
- Storage
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