Xplain the benefits of special journals and subsidiary ledgers - Essay Example

Journals and Subsidiary Ledgers Journals and Subsidiary Ledgers Success of any business normally determined and evaluated by use of financial statements prepared after a certain financial period. The major financial statements used by businesses and companies are the income statement, the statement of cash flow and the balance sheet. Income statement also referred to as profit and loss statement or statement of revenue and expenses is a financial statement used to measure the financial performance of a company for a given accounting period.

This performance normally evaluated by determining the company’s summary of its revenue and expenses for both operating and non-operating activities. This statement is also used to show net profit or loss the company or business incurred after a given accounting period. Balance sheet also known as statement of financial position is a financial statement showing the summary of financial balance of a business. The statement also shows the company’s financial condition. The two financial statements have different accounting transactions presented in these statements (William et al, 2008).

While income statement describes the performance of a business of the current year, balance sheet shows the company’s overall position as from the beginning of the year to the current year. The transactions posted on the balance sheet include assets, liabilities and equity, the balance sheet has three parts arranged in liquidity order, assets are followed by liabilities. The difference between assets and liabilities gives capital, in the balance sheet the records of each account is usually maintained using double entry book-keeping, which is an accounting system.

The transactions posted on income statement include revenues and expenses, this statement is however, divided into two parts the operating and non-operating sections. The operating section shows information concerning the revenues and expenses of the business, which comes because of regular operations of a business. Non-operating section shows information not related to direct regular operations of the business (Daniels & Mortimer, 1980). Information from these financial statements is normally posted in different journals and ledgers.

Transactions made on income statement affect it in different ways, for example, an increase in sales by a certain amount affect the income statement since it will provide an additional income thus increase in net profit and vice versa when income from sales reduces. These sales also have an effect of balance sheet. Employee’s transactions, which amount to expenditure on employees, have an effect on the income statement and on the balance sheet since it amounts to increase in expenditure (William et al, 2008).

Financial statements are crucial in the daily operations of the business, every business need a well-structured financial statements. The documents are vital in providing information concerning the financial position, changes in financial position and the performance of a business enterprise. Different users use these statements for different purposes, for example, managers and business owners use these statements when making crucial decisions relating to the businesses, employees on their part use information from these statements when making bargaining agreements and information relating to promotion and ranking with the management.

Prospective investors and financial institutions also use information from the financial statements when making decisions concerning the ability of the business of the company to meet the required requirements for investment or to be given funds. Tax authorities require financial statements in making decisions concerning taxes and duties meant to be paid by the company, by using these statements the government will be in a position to tax the correct amount, thus tax evading is minimized. Public, media and vendors are other users of financial statements in accessing credit worthiness and viability of the business (William et al, 2008).

References"The Framework for the Preparation and Presentation of Financial Statements". International Accounting Standards Board. Accessed 24 June 2007.Daniels, J. & Mortimer, P (1980). Corporation Financial Statements. New York: New York: Arno Press.Williams, R., Susan F., Bettner, M. & Joseph, V.(2008). Financial & Managerial Accounting. McGraw-Hill Irwin. p. 40.