How do the four financial statements work together?
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IN what ways do the elements of the four financial statements interact with one another?
How might changing one of the financial statements affect the other finanacial statements?
Why is it essential to understand the relationship between the financial statements?
The four statements are:
Balance Sheet
Income Statement
Statement of Owner's Equity
Statement of Cash Flows
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Solution Summary
A discussion of how the four financial statements work together, including a discussion of the basis accounting equation and how general transactions affect each statement.
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The four financial statements fit together in the classic method of double entry accounting. Please see the attached Word doc for a complete print out with clearer formatting.
The four financial statements flow together to give a complete picture of the financial health of an organization. There are three types of permanent (real) accounts; Assets, Liabilities and Equity. There are also three major types of nominal accounts; Revenue, Cost-of-Sales and Expense. (Cost of sales is an expense, but a specific category of expense).
At the end of a fiscal period (typically 1 year) the nominal accounts close into an equity account, called Retained Earnings. Then the nominal accounts are resent to zero and the results of the previous period are moved to the balance sheet to become part of the real accounts. (Equity).
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