Financial accounting reports disclose the financial activities of particular individuals or organizations described as reporting entitiesParticular businesses or other organizations for which financial statements are prepared.. Each entity is treated as a separate reporting unit. For example, a business, the person who owns the business, and a bank that loans money to the business are treated as three separate reporting entities. Accountants would prepare three separate sets of financial reports to describe the economic activities of each of the three entities. The first step in understanding accounting reports is identifying the reporting entity.

This text describes accounting from the perspective of business entities. This perspective may require a mental adjustment in your view of the world. You likely think from a customer perspective. For example, you think—from a customer perspective—a sales discount is a great thing. The view is different, however, from the perspective of the business granting the discount. A sales discount means an item did not sell at the expected price. To move the item, the business had to accept less money than it originally planned to accept. From this perspective, a sales discount is not a good thing. To understand accounting, train yourself to interpret transactions from the perspective of a business rather than a consumer.

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In a recent business transaction, land was exchanged for cash. Did the amount of cash increase or decrease? Answer The answer depends on the reporting entity to which the question pertains. One entity sold land. The other entity bought land. For the entity that sold land, cash increased. For the entity that bought land, cash decreased.