The Different Functions of Financial Statements

 

What I originally liked about accounting was the symmetry of the double entry concept.  The way accounts and entries must balance appealed to a highly rational approach to business.  But it still took a long time for me to really understand it without having to stop and think for a while about what was happening when a transaction was made.  What really made it click for me was the understanding of the “temporary” (income statement) versus the “permanent” (balance sheet) accounts.  This concept was reinforced when I saw how (generally) every entry made effected one or more of each account type and as a result, each statement.  I think this basic understanding underpins most of what is happening in the accounting cycle, and can be helpful to understand the relationships between various account types, transactions, statements and reports.

Where these concepts might be helpful for higher level management is to recognize that something might not be quite right on a financial statement.  For example, if an operations or other manager is reviewing the financial statements with the controller at month end, questions may come up based on how something is reflected on a particular financial statement.  This may result in a correcting entry, or it may reveal a problem or issue that needs to be addressed in the operations of the organization.  Another application would be the analysis of the performance of an organization.  With a basic understanding of how things ought to look on a set of financials, even from a general sense, conclusions can be made and future decisions will benefit from the historical data produced by the accounting department.  This can benefit the planning and budgeting process in particular.  This basic understanding can also safeguard against fraud or other ethical problems that might be reflected in a set of financial statements, and recognized because they simply do not pass the “smell test.”

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