This is the first of a two-part series on the basics of financial accounting.
Financial Accounting in the Information Age
Financial Accounting for the Information Age
For more information on how accounting works, you may be interested in a related article on the difference between the current year’s and the following two years’ financial statements.
What Do You Need to Know about the Balance Sheet?
When you’re setting up your own business, you’ll probably get a good amount of your capital stock from selling shares of it to your customers, and to investors, and to creditors.
Your business’s financial statements, known as the financial statements, show the total assets, liabilities, and equity of your business. And they show, by looking at the income and expenses of your business, how much money was made and how much was spent.
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However, a financial statement is not just the balance sheet for your company.
- Financial Accounting begins with an understanding of the elements of financial statements. There are three key elements to financial statements:
Cash – Cash is the financial record of all the money that is available to the company for expenses and for repayment of debts. The cash balance of a company represents the total amount of money available to pay debts and debts are recorded as “current” cash. Assets – Assets are those objects, tangible and intangible, that have been acquired for cash. Assets are recorded as “cash equivalents” and are valued by estimating the “cost of acquisition.” Assets that are not considered “cash equivalents” are recorded at cost.
Accounts receivable – Accounts receivable are the liabilities that a company is owed for the payment of money, such as for services rendered. Accounts receivable are recorded as “current” accounts payable and “current” receivables. Liabilities – Liabilities are the obligations that a company has taken on in exchange
Most of the people reading this will know what a balance sheet is. However, most of them will never read one of the key financial accounting textbooks, because they don’t know what a balance sheet is. A balance sheet shows you where all your money is, how much you have in it and where it’s going. It’s very simple. The first step in understanding financial accounting is to define a balance sheet. Here are the two important things to know about balance sheets:
They are used to see how the cash flow of your company matches up to the expenses.
Your balance sheet is a record of all the money that you have in your company, how much it’s worth, what’s going to be spent from it and what’s going to be earned from it.
As a business owner you have to understand how your business is running and how it works so you can make smart decisions.