Financial statements reflect the financial impact of transactions and other events by combining them into large classes according to their economic characteristics. These large classes are called financial statement elements. Elements directly related to the measurement of financial statements in the balance sheet are assets, liabilities, and shareholders’ equity. Only if property and finances are accounted for can they make a profit – that is the purpose of the financial report of these components. Elements directly associated with the evaluation of performance in the income statement are income and expenses. Analysis of these components helps to identify trends and proportions of profit distribution compared to the planned indicators.
Business operation in accounting is a fact of entrepreneurial or other activities that affect the organization’s financial position, the state of property, liabilities, cash flows, and the number of financial results. Based on the cash exchange, there are three types of accounting transactions: cash transactions, non-cash transactions, and credit transactions (Corporate Finance Institute, 2018). In operations, financial analysis is used to assess the company’s financial condition, set limits for the formation of plans and budgets, and assess the projected and achieved results of operations (Stobierski, 2020). The following main components of economic analysis are reports of accounting statements, horizontal and vertical analysis, trend review, and calculation of financial ratios.
Various business operations can have different effects on the balance sheet indicators, their structure, or the currency of the balance sheet. In this case, since the balance sheet consists of two sections, asset (A) and liability (L), in terms of the impact on the balance sheet, business operations are of 4 types. The first type of operation increases one kind of asset and decreases another asset (Lumen Candela, 2017). For example, such operations are the release from the production of finished goods by a certain amount.
The operation changes two lines of the balance sheet; the number of changes is the same. One balance sheet item increases, the second decreases, and the sum of the balance sheet total are not affected by this operation. Such operations may include receiving the money to the cash desk from the current account, receiving money from accountable persons, receiving materials for production, and much more.
The second type of operation reduces one kind of liability and raises a different type of liability. An example would be when an organization allocated part of its net profit to create a reserve fund. The reserve capital item will increase, and the net profit item will decrease, but the amount in both cases is the same – the balance sheet currency does not change. This type of operation’s example includes withholding taxes from payroll.
Increased assets and liabilities characterize the third type; the balance sheet’s currency also rises. Increased assets and liabilities indicate4 the third type; the balance sheet’s currency also rises. When increasing the balance sheet lines on different sides, equality is maintained. Examples include transactions related to the receipt of a fixed or intangible asset, the accrual of wages of employees engaged in production, and the receipt of credit. The fourth type is associated with a decrease in the asset and liability; the balance sheet’s currency fails. Loan repayment, repayment of debts to employees, budget, and many other transactions will serve as examples of such operations.
It should be borne in mind that types III and IV of economic transactions always change the balance sheet structure and its currency. However, in types I and II, the currency is always unchanged, but the design of the balance sheet assets may change and may remain unchanged. Thus, the types of business operations that change the structure of assets or liabilities do not always lead to changes in the balance sheet indicators.
References
Corporate Finance Institute. (2018). Accounting transactions.
Lumen Candela. (2017). The basics of accounting. Web.
Stobierski, T. (2020). 4 Steps to determine the financial health of your company. Web.