Accounting / Bookkeeping Basics: Accounting Methods and Financial Statements

Financial Statements: Financial statements are a formal record of a Company’s financial activities and position.
Accounting gives us the ability to see profit or loss for a given period. It shows the value and nature of a firm’s assets, liabilities, and owner’s equity. Employing a systematic method, accounting identifies measures, classifies, verifies, records, summarizes, interprets and communicates financial information.

Accounting is not the same thing as finance. While they are two parts of the same picture, there are some key differences. Accounting is the documentation of financial statements recording the day to day transactions of a business. Finance, on the other hand, is the management of assets and liabilities, responsible for decision making and managing cash flow.

There are two basic types of accounting methods. These are cash accounting and accrual accounting.

Cash Accounting: The method of cash accounting means that you record income when cash is received and expenses are recorded when they are paid. This method is usually recommended for small businesses and it shows a clear way to monitor profits and losses.
Accrual Accounting: When using the accrual method, you log transactions as they occur even if the cash hasn’t changed hands yet. This method is usually the choice for larger corporations. .

There are four basic types of information that is provided by an accounting report, also known as a financial statement. All of this information is important to know, and to understand.

1. Cash Flow: This is the flow of cash coming in and out of business activities including operating, investing, and financing.

2. Results of Operations: This is the net income for a specific period of time. This period of time can be a month, a quarter, a year or any other specific time frame. Net income is the income left after you have deducted all expenses from all income.

3. Financial Position: This will show a company’s assets, Liabilities and capital.
a. Assets are the resources the company currently has;
b. Liabilities are the amount that is owed to third parties; and
c. Capital is the money left over after all expenses have been paid.
d. Solvency and liquidity: This is the ability to pay obligations.
e. Solvency is the ability to pay obligations when they are due; and
f. Liquidity is the ability to meet short-term obligations.