Question

Write a memo to the sisters in which you explain the following items and concepts:

What financial statements are, what their purpose is, and what information they convey

The difference between the cash basis of accounting and the accrual basis of accounting

The advantages and disadvantages of each form of business organization

The closing process, including the difference between temporary and permanent accounts

Answer 1

1) financial statements - profit & loss , balance sheet , cash flow statement , statement of changes in equity

purpose  of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions .

Financial statements are reports issued by companies in order to convey information about their financial health and recent results. These statements are intended to convey financial information as clearly and accurately as possible for investors, prospective investors, analysts, and any other interested parties.

b) difference between cash basis and accrual basis

The cash basis is a method of recording accounting transactions for revenue and expenses only when the corresponding cash is received or payments are made. Thus, you record revenue only when a customer pays for a billed product or service, and you record a payable only when it is paid by the company.

accrual accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged. The term "accrual" refers to any individual entry recording revenue or expense in the absence of a cash transaction.

cash basis accrual

1)it is not acceptable in business it is more acceptable in business

2)correct profit and loss not ascertained correct p&l ascertained because

because it records cash figure only it records both cash basis and accrual.

3) advantage and disadvantage of each form of orgainstion

Advantage disadvantage

sole proprietorshiop owner make all decision owner is personally liable for liability

partnership funding by each partnership profit distributed between partners

sharing of experience

comany liability limited lack of secrecy

perpetual existence managements mischief

d) closing process - all item nature of expense and income are closed during the year is known as closing process or closing entries.

difference between temporary and permanent accounts

Temporary accounts come in three forms: revenue, expense, and drawing accounts. Permanent accounts are found on the balance sheet and are categorized as asset, liability, and owner's equityaccounts. Temporary accounts are zeroed out by an action called closing entry which are closed during year .

permanent account carried from one accounting period to another accounting period.

Temporary accounts, which are also called nominal accounts, are company accounts whose balances are not carried over from one accounting period to another, but are closed, or transferred, to permanent accounts at the end of an accounting period. The purpose of temporary accounts is to show how any revenues, expenses, or withdrawals (which are usually called draws) have affected the owner's equity accounts. The accounts that fall into the temporary account classification are revenue, expense, and drawing accounts.

Permanent accounts, which are also called real accounts, are company accounts whose balances are carried over from one accounting period to another. Permanent accounts are the accounts that are seen on the company's balance sheet and represent the actual worth of the company at a specific point in time. Though the balances in these accounts change from daily transactions that are part of the normal business operations, these account balances are never closed out nor transferred to the owner's capital account.