Using accounting it is possible to evaluate how well a company is performing economically, and if it is necessary to make certain actions to be able get a stronger and more stable economy. It is therefore for internal investment decisions, and performance evaluation. However, it is also used for external purposes such as attracting people outside the company for more capital: Equity (shareholders), debt, (loans), credit (supplier), costumers, and employees. Key areas for accounting will be described.

Balance sheet

The balance sheet is a statement of the financial position of a business on a specific date, which contains assets and liabilities. The balance is defined through Eq. 4.1. The difference between them is the owners’ equity in the company.

Assets = Liabilities+Owners’ equity

The purpose of a balance sheet is to give an insight into the value of assets and liabilities.

Assets

There are many different kind of assets for a company. Overall assets are what the company owns. Assets is acquired through transactions to for instance buying physical things as tools (asset is what is bought) or selling (asset is the money received or promised). More specifically, assets is cash, inventory (machinery, buildings, land), intangible assets (patents, copyright, goodwill). The assets is categorised into two groups: fixed assets and current assets.

Liabilities

Liabilities are what the company owes, which must be paid through cash, goods, or services. This is for instance obligations for salary, interest, tax, bonds, mortgages, etc. Liabilities are based on two groups: Capital, and borrowed capital.

Depreciation

An important aspect to consider is depreciation, as it is the decline of value of an asset over time. Most assets depreciate, such at material, or tools. If depreciation is not used the assets will be valued more than actual value, which will create a misrepresenting. ideally the depreciation would equal the exact value when sold, however depreciation holds uncertainties until an actual buyer is found. Methods used for depreciation is therefore approximates for the book value of an asset.

As depreciation lowers value of assets it is considered an expense for taxation. Higher depreciation for assets therefore decreases the tax paid. Thus, companies try to depreciate assets fast for taxation purposes, as this gives them a tax deduction sooner rather than later. Money now is worth more than money later. There are different methods used for depreciation, which can determine the depreciation charged each yeah. This is also used for the book value. Some widely used will be accounted for. Full examples of how the different methods are used are illustrated in App