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Three Main Documents of Accounting

11 OCT 2012
Career Path : Accounting

Accounting is a numbers game, though the stakes are often much more severe than in any ordinary game. Companies can rise and fall based on the skills of an accountant or the slightest error in calculation. Accountancy is where a company proves its legitimacy and sincerity in terms of its business dealings. Accountancy is sometimes also the tool of criminal activity. What this means is that the work of an accountant requires serious education, dedication and integrity. It may not seem as much fun as an ordinary game, but for those who love the power of numbers and calculations, especially in dealing with large sums of money, accountancy is as exciting a career as any.


Things have certainly changed in the last few decades in terms of how accountants work. A long time ago everything was done by hand, written in a ledger book, and using the mental capacity for arithmetic. Calculators have helped for basic calculations. Computerized accounting software has done a lot for helping the complex equations of so many numerical factors, and they are even used today by the average person doing their taxes. But just because technology has come a long way in the service of accountancy, does not mean today’s accountant doesn’t require the comprehensive education provided by accounting courses. Relying too much on software runs the risk of neglecting to understand the basic principles of accounting, beginning with three of the main documents used to understand a company’s financial standing. They are the balance sheet, the income statement, and the cash flow statement.


The Balance Sheet

The balance sheet is a summary of everything the company has in the way of money and other assets. This means everything that has monetary value, like everything from the company’s equipment, inventory and property. These are things that can be sold. Balance sheets also include the company’s liabilities, in other words, money that the company owes, either to other companies or to a bank.


The Income Statement

This document details more of the company’s actual performance in terms of how much money they have made or lost in a given financial period. It is the total net value of the company’s earnings. Income statements describe the profit (or loss) of a company when all of its expenses and deductions are subtracted from all the money made through sales or investments.


The Cash Flow Statement

Whereas balance sheets and income statements refer to fixed numbers, the cash flow statement refers to variable figures—in other words, flowing numbers. By using the above documents, the cash flow statement helps an accountant understand the company’s ability to continue doing business and growing, or whether the company is headed toward more loss. It is tied to surpluses and deficits rather than to profit or debt.


Knowing how to read and analyze these documents is a cornerstone of any accounting diploma. While computers can help with equations, they can never substitute this kind of understanding that only humans are capable of.



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