Account Analysis

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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:

  1. How account values are analyzed
  2. 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).

Legal regulations

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).

Examples of Account Analysis

  1. Horizontal Analysis: It is a technique used to compare financial information of different periods. It involves comparing of two or more years' financial information in absolute terms (dollars) and relative terms (percentages). For example, a company can compare its current year sales to its previous year’s sales to find out whether the company is growing or not.
  2. Vertical Analysis: It is a method used to compare financial information of different periods. It compares different items in a financial statement as a percentage of a base figure. For example, a company can compare its current year sales to its total assets to find out how efficient its sales efforts are.
  3. Ratio Analysis: It is a technique used to compare financial information of different periods. It involves calculating the ratio of two items in the financial statements to compare their relative performance. For example, a company can calculate its current year debt to total equity ratio to find out how effectively it is managing its debt.
  4. Trend Analysis: It is a technique used to compare financial information of different periods. It involves plotting multiple periods' financial information on a graph to identify the trend of the item in question. For example, a company can plot its sales revenue for the past 5 years to find out whether its sales are increasing or decreasing.

Advantages of Account Analysis

Account analysis is a process of carefully inspecting and verifying the financial statements of a company. It allows accountants and auditors to identify potential discrepancies and errors in the company’s financial records. Here are the main advantages of account analysis:

  • It helps to validate the accuracy of financial statements, as well as to identify any discrepancies or errors. This is especially important for investors, who rely on the accuracy of financial statements when making decisions.
  • It provides an insight into the company’s financial performance and allows managers to make more informed decisions.
  • It can also be used to identify areas of improvement and cost savings, which can lead to increased profitability and efficiency.
  • Account analysis can also be used to detect fraud or embezzlement, which can save the company from significant financial losses.

Limitations of Account Analysis

Account analysis has several limitations:

  • It is time consuming and costly. As a result, it may not be feasible for small businesses with limited resources.
  • It does not provide a complete picture of the financial health of the business. Factors such as customer loyalty, product innovation and operational efficiency are not taken into consideration.
  • It is based on historical data, which may not be reflective of the current situation.
  • It is based on assumptions and estimates, which may not be accurate.
  • It does not provide insight into the business’s future prospects.

Other approaches related to Account Analysis

Account analysis is a process of carefully checking each line in balance sheet, income statement and profit and loss account to detect differences. There are a number of other approaches related to account analysis which can be utilized by accountants and auditors in order to get a better understanding of the financial situation of a company:

  • Ratio Analysis: This approach involves measuring the relationship between two financial metrics and comparing the results with industry averages or other benchmarks. Ratios can provide a better understanding of a company’s financial performance, liquidity, profitability and solvency.
  • Benchmarking: This approach involves comparing a company’s performance to industry averages or other companies in the same industry. It can be used to identify areas of improvement and opportunities for growth.
  • Trend Analysis: This approach involves analyzing a company’s financial performance over a period of time. It can be used to identify patterns, detect problems and make informed decisions.
  • Cash Flow Analysis: This approach involves analyzing the company’s cash flow to determine whether it is able to cover its short-term and long-term obligations.

In summary, account analysis is a process of carefully checking each line in balance sheet, income statement and profit and loss account to detect differences. There are a number of other approaches related to account analysis which can be used by accountants and auditors in order to get a better understanding of the financial situation of a company, such as ratio analysis, benchmarking, trend analysis and cash flow analysis.


Account Analysis — recommended articles
Comparative statements — Annual Basis — Common-size financial statement — Horizontal Analysis — Accounting ratios — Interim Statement — Accrual method — Operating cash flow ratio — Subsidiary account — Emission factor

References

Author: Angelika Orlof

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