The purpose of accounting is to provide information necessary for sound decision-making, states QuickMBA. Financial reports are prepared to provide investors, creditors, tax authorities and other external parties with accurate information about a business.
The two primary objectives of businesses are to earn a profit and to remain solvent, according to QuickMBA. To prove success in those two areas, an accountant prepares financial statements. To allow interested parties to evaluate these areas, businesses provide four types of financial statements: a balance sheet, an income statement, a statement of the owner's equity and a statement of cash flow. To be useful, these statements must be understandable, timely, relevant and free from bias, indicates QuickMBA.
Part of the accounting process includes bookkeeping, which is simply the record of a business' transactions. In financial statements, accountants use the records from bookkeeping to create an analysis about the business' financial situation. According to QuickMBA, the accounting cycle is the process by which transactions are recorded and analyzed repeatedly. In the preparation of financial statements, the fundamental accounting model is that a business' assets are equal to the sum of its liabilities and equity. This model has been used since the 18th century, notes QuickMBA.