The
third financial statement that Femi needs to understand is the Statement of
Cash Flows. This statement shows how Fast Delivery's cash amount has changed
during the time interval shown in the heading of the statement. Femi will be
able to see at a glance the cash generated and used by his company's operating
activities, its investing activities, and its financing activities.
Much of the
information on this financial statement will come from Fast Delivery's balance
sheets and income statements.
The
three financial reports that Chima introduced to Femi—the income statement, the
balance sheet, and the statement of cash flows—represent one segment of the
valuable output that good accounting software can generate for business owners.
Chima
now explains to Femi the basics of getting started with recording his
transactions.
Double Entry System
The
field of accounting—both the older manual systems and today's basic accounting
software—is based on the 500-year-old accounting procedure known as double
entry. Double entry is a simple yet powerful concept: each and every one of
a company's transactions will result in an amount recorded into at least
two of the accounts in the accounting system.
The Chart of Accounts
To
begin the process of setting up Femi's accounting system, he will need to make
a detailed listing of all the names of the accounts that Fast Delivery, Inc.
might find useful for reporting transactions. This detailed listing is referred
to as a chart of accounts. (Accounting software often
provides sample charts of accounts for various types of businesses.)
As
he enters his transactions, Femi will find that the chart of accounts will help
him select the two (or more) accounts that are involved. Once Femi's business
begins, he may find that he needs to add more account names to the chart of
accounts, or delete account names that are never used. Femi can tailor his
chart of accounts so that it best sorts and reports the transactions of his
business.
Because
of the double entry system all of Fast Delivery's transactions will involve a
combination of two or more accounts from the balance sheet and/or the income
statement. Chima lists out some sample accounts that Femi will probably need to
include on his chart of accounts:
Balance
Sheet accounts:
- Asset accounts (Examples: Cash, Accounts Receivable, Supplies, Equipment)
- Liability accounts (Examples: Notes Payable, Accounts Payable, Wages Payable)
- Stockholders' Equity accounts (Examples: Common Stock, Retained Earnings)
Income
Statement accounts:
- Revenue accounts (Examples: Service Revenues, Investment Revenues)
- Expense accounts (Examples: Wages Expense, Rent Expense, Depreciation Expense)
To
help Femi really understand how this works, Chima illustrates the double entry
with some sample transactions that Femi will likely encounter.
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