Question

How does the accounting system expressed in the balance sheet, income statement, and statement of cash flows contribute to the education of investors and other users of these financial statements?

Answer 1

An Accounting System is a system that is employed in a company to organize financial information. The reason for using an accounting system is to keep track of expenses, income, and other activities. Basically keep an eye on all data that affect the finances of a business organization. How does the accounting system expressed in the balance sheet, income statement, and statement of cash flows is explained below :

1. A balance sheet is a financial statement for a business that lists assets, liabilities, and equity. Fundamental Relationship of assets , liabilities , and equity is expressed in Accounting Equation as follows:

Assets = Liabilities + Equity.

The above Equation expresses the accounting system in balance sheet.

2. The Income Statement is a financial statement that shows the Company’s profit and loss. The P&L statement shows a company's ability to generate sales, manage expenses, and create profits over a period of time. The income statement presents the financial results of a business for a stated period of time.

Income Statement shows the Company’s Profit and Loss by using the Accounting System that helps the Company to keep track of expenses, income and other related activities.

3. The Cash flow statement, also known as Statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.

It provides aggregate data regarding all cash inflows a company receives from its ongoing operations and external investment sources. It also includes all cash outflows that pay for business activities and investments during a given period.

Accounting system is the basic thing that helps the companies for preparing their Financial statements.