Account analysis is performed by accountant or auditor. It is a process of carefully checking each line in balance sheet, income statement and profit and loss account to detect differences. Moreover, well done analysis helps managers in making decisions, investors and shareholders invest their money well.
Type of account
There are three types of account:
- Assets - presents company resources and they are shown on debit side.
- Liability - present a liability to related parties and occupy a credit page.
- Equity - they represent owners' shares and the capital contributed to the company also occupy the credit side.
The above accounts are distinguished in the general ledger. They may be presented in a variety of formats but most common is T-account format. Accounts are presented on both sides by debit and credit. Presentation using a T-account helps to carry out the analysis correctly. Second most popular way to presents account is to show a list of all transactions in the general ledger how they affected the company's cash(V. Thakkar 2014).
Account analysis method
The analysis can be divided according to:
- How account values are analyzed
- In which sector of economy the analysis is performed
From the first group vertical and horizontal analysis are distinguished. Vertical analysis shows the values as percentage of the base value. Because of that each line in the balance sheet is analyzed as percentage of total assets, equity or liabilities. In income statement the main value is gross sales and in the cashflow it is total cash inflows. Horizontal analysis focuses on value changes over time. The second type divides analysis into analysis in accounting and banking. The first one is very difficult and requires a thorough understanding the company's business. The process is performed by the chief accountant with the help of a person responsible for costs. In banking company account bank statement are subject of analysis (G.M.Zack 2009 p.220-221).
Account analysis based on various legal documents. Each country has its own accounting regulations. International regulations have also been created for companies operating in various countries. Examples of main accounting regulations in Poland:
- The Accounting Act
- National Accounting Standard
- International Accounting Standard
- International Financial Reporting Standard
- European Union directive
Each country comes first with it own legal acts on the basis of which account analysis is carried out. International regulations are made by Accounting Standard Board whose main purpose is to bring benefits to users and companies in accounting and auditors in analysis (M.Pendlebury 2004 p.6-7).
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- Paci E. (2012), Summary of the evidence of breast cancer service screening outcomes in Europe and first estimate of the benefit and harm balance sheet. Journal of Medical Screening, Volume 19, Suppl 1, p. 5-13.
- Pendlebury M., Groves R. (2004), Company Accounts Analysis Interpretation and Understanding. Thomson p. 3-41.
- Shaffer M. (2010), Multiple Account Benefit-Cost Analysis a Practical Guide for the Systematic Evaluation of Project and Policy Alternative. University of Toronto Press.
- Thakkar V. (2014), Balance Sheet: The Tale of Asset & Liability. TV 18.
- The Accounting Act. (1994), Dz. U. 1994 Nr 121 poz. 591.
- Zack G.M. (2009), Fair Value Accounting Fraud New Global Risks and Detection Techniques John Wiley and Sons Inc., p. 219-227.
Author: Angelika Orlof