Accounting and its financial statements

Accounting is the systematic development and analysis of information about the economic affairs of an organization. This information may be used in a number of ways: by the organization’s managers to help them plan and control the organization’s operations; by owners and legislative bodies to help them appraise the organization’s performance and make decisions as to its future; by owners, lenders, suppliers, employees, and others to help them decide how much time or money to devote to the organization; by governmental bodies to determine how much tax the organization must pay; and by customers to determine the price to be paid. Accounting provides information for all these purposes through the maintenance of files of data, analysis and interpretation of these data, and the preparation of various kinds of reports. These reports are called financial statements. Three financial statements will be discussed: the balance sheet, the income statement, and the statement of cash flows. Accountant is a professionally qualified person who is able to record, keep, check, and prepare financial statements.

A balance sheet describes the resources that are under a company’s control on a specified date and indicates where these resources have come from. Any balance sheet consists of three major sections: (1) the assets: material values and money resources owned by the company; (2) the liabilities: the funds that have been provided by outside lenders and other creditors in exchange for the company’s promise to make payments or to provide services in the future; and (3) the owners’ equity: the funds that have been provided by the company’s owners or on their behalf.

The company’s income statement for a period of time shows how the net income for that period was derived.

Companies also prepare a third financial statement, the statement of cash flows. Cash flows result from three major groups of activities: (1) operating activities, (2) investing activities, and (3) financing activities.

1) What is meant by the term “accounting”? 2) What people deal with accounting and why? 3) What does accounting provide its information through? 4) What three financial statements are mentioned in the text? 5) What is meant by the term “accountant”? 6) What does a balance sheet describe? 7) What does a balance sheet indicate? 8) What sections does any balance sheet consist of? 9) What is meant by the term “assets”? 10) What is meant by the term “liabilities”? 11) What funds does the owners’ equity include? 12) What does the company’s income statement show?

Insurance, the insurer and the insured

To insure means to buy insurance to protect yourself against something bad happening to you, your family or your possessions. The insurer is a person or company that provides insurance. The insured is the person or people who are insured. Insurance is a contract in writing between an insurance company and the insured, whereby the insurance company will pay the insured a stated sum of money on the happening of a stated event. [Frequently the word insurance and “assurance” are used in the same way.] In return for a specified consideration, the insurer undertakes to pay the insured some specified amount in the event that the insured suffers loss through the occurrence of a contingent event covered by the insurance contract (insurance policy). By pooling the financial contributions of a large number of policyholders, the insurer is usually able to absorb losses incurred over any given period much more easily than would the uninsured individual. While the destruction of an automobile in a traffic accident imposes a heavy financial loss on an individual, for example, one such loss is of relatively small consequence to an insurer who is collecting sufficient premiums (insurance premium is the money that you pay regularly to an insurance company) on a large number of automobiles.