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Interrelationships between the Four Financial Statements

Objective 6
Now you will see how entries are performed in the four basic financial statements and how these statements interrelate

The interrelationship between the four financial statements: Balance Sheet, Income Statement, Statement of Cash Flow and Statement of Changes in Equity shows how each transaction is entered simultaneously in these four statements.

The importance of the interrelationship between financial statements is how the four financial statements are interrelated, and as a group of statements, inform different and mutually associated aspects of the company's financial standing in a comprehensive manner, namely, profits or losses, assets and liabilities, debtors and creditors, cash, inventory, debt and equity.

When a transaction is entered in the accounting equation (balance sheet), depending on the type of transaction being recorded, it may or may not have an entry in some of the other three financial statements.

When studying typical transactions in Section 2, Operating the Firm, the interrelationship between statements will be made clear as entries for each typical transaction will be shown in the applicable statement.

To illustrate how financial statements are interrelated among themselves we will consider the following three cases taken from Section 2, Operating the Firm:

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