Judging the Financial Position

Judging the Financial Position

Here is the farmer, who had a good harvest worth $2000. 

Now, what can we say about his economic condition? Is he doing well in his production business? 

Definitely, it wouldn’t be appropriate to say he is doing well, by just looking at the harvest in his hands

$2000 worth of harvest doesn’t truly represent his economic condition. Maybe he owes a million dollars to somebody. To know this fact, we have to check his past financial transactions. 

Thus, accounting deals with tracking the day to day financial transactions of a business. Accounting can be of any type, in the case of a farmer he may use some book to record his daily transactions, while formalized businesses create financial statements.