Financial Statements: The Purposes of Accounting


Every institution or organization depends on its financial viability. Financial position measures the strength of every government and separates the weakest from the strongest. The contemporary global world is defined by its financial muscles; those considered poor and thus third world have weak financial systems and vice versa. How do we distinguish weak systems from strong ones? This can only be done by availing of their relevant financial information. There has to be a process of collecting, analysis and presentation of this information, which calls for accounting. This paper will define the purposes of accounting; give the basic financial statements, relation to each other as well as their use in the various fields of accounting.

Accounting can be referred to as a process that involves identifying data or information, measuring it, and presenting the results to allow for informed judgments and verdicts by users of the data or information. The process entails bookkeeping for computation purposes (U.S. Securities and Exchange Commission, 2007, p. 1). It is worth noting the main processes involved are Identification, recording, and communication.

Purpose of Accounting

The purpose of accounting is basically for accountability. This helps in the evaluation of the performance of an entity or system and hence informed decisions can be made based on profitability and sustainability. Accounting keeps the users of the information or data-informed of the financial status, progress, or failure of their management system. This can help in executing various reforms to help in better sustainability or profitability. Accounting, therefore, reports the financial point of the business or organization as well as provides a clear performance line over a given time limit. This is very helpful in monitoring the highs and lows in profitability and risk management (Weygandt, Kimmel & Kiesi, 2008).

Financial Statements and their interrelations

A financial statement can be defined as a formal or official record of financial events of an entity like an organization, individual, or government among others. In some places like Britain, financial statements are referred to as accounts. Its use is particularly relevant to accountants who monitor its trend. In large organizations, these statements are normally structured for easy understanding, analysis, and computation for auditing purposes. Financial statements are the tools used in communicating the viability of a business; they convey messages from the numbers or data presented. The most common and basic statements of finance used in businesses are the balance sheet, profit & loss of income, cash in and outflows, and retained earnings (Weygandt, Kimmel & Kiesi, 2008).

The balance sheet is usually used to provide data of assets held by an entity, it also gives the liabilities and the worth of the owners at a particular instant. An income statement shows the total revenues, expenses as well as the outcome of the organization; the profit or loss attained during the given period. cash flow on the other hand gives a short account of activities relating to the business in receipts and also payments, in a given time. The other which is retained earnings gives a shortened account of earnings that have been retained during a particular time.

The balance sheet unlike the other financial statements is generated at a given point in time. This is because of the nature of what it measures; assets depreciate, and stocks increase and decrease. It cannot, therefore, be taken for some time; the other statements of finance are generally used for a period. One linking factor on the financial statements is the fact that they use just a single group of notes or records for their computations. Balance sheets are normally done either at the beginning of the end of a transaction period. The results from the balance sheets are then used in computing the profit and loss account (Weygandt, Kimmel & Kiesi, 2008).


The balance sheet is very essential in giving a snapshot of the company’s assets and general performance. It is very important to creditors and is a tool used in accessing loans. This is because it gives resources owned by the business and essentially brings out the gross profit. Similarly, a profit and loss account is very essential in giving information regarding the profitability of the business. This can be used to evaluate the performance of the company as well as the implementation of better management measures (U.S. Securities and Exchange Commission, 2007, p. 1). Cash flow statements help in providing the business with the trend of trade, this can be used to predict high seasons for more supplies and its data is very useful in preparing other statements. Retained earnings statements are also very useful in the planning and expansion of businesses.


Accounting is a representation of accountability of the business or organization. This is very useful in determining its performance. Financial statements are very essential in determining the creditworthiness of a business, the number of employees required, they are also the determinants of good management and leadership in a system, t results are also important in providing investor confidence (Weygandt, Kimmel & Kiesi, 2008).

Reference List

U.S.SecuritiesandExchangeCommission.(2007).BeginnersGuidetoFinancialStatements. Web.

Weygandt J. J., Kimmel P. D. & Kieso D. E. (2008).Financial Accounting. (6th ed.). John Wiley & Sons, Inc.

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