The purpose of accounting is to
provide the information that is needed for sound economic decision making. The
main purpose of financial accounting is to prepare financial reports that
provide information about a firm's performance to external parties such as
investors, creditors, and tax authorities. Financial accounting, on the other
hand, is performed according to Generally Accepted Accounting Principles (GAAP)
guidelines. In order that financial
statements report financial performance fairly and consistently,
they are prepared according to widely accepted accounting
standards. These standards are referred to as Generally Accepted
Accounting Principles, or simply GAAP. Generally Accepted Accounting Principles
are those that have "substantial authoritative support". The four financial
statements are reports that allow interested parties to evaluate the
profitability and solvency of a business. These reports include the following
financial statements:
- Balance Sheet
- Income Statement
- Statement of Owner's Equity
- Statement of Cash Flows
These
four financial statements are the final product of the accountant's analysis of
the transactions of a business. For the reports to be useful, they must be:
- Understandable
- Timely
- Relevant
- Fair and Objective (free from bias)
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