Financial accounting is commonly referred to as the “language of business.” An understanding of the fundamental concepts and principles of accounting is always needed to make more informed decisions, contribute to strategic conversations, and build and run businesses.
Accounting has been described as a tool that opens doors to key information, provides useful insights, helps gain perspective, and aids in decision-making.
The beginning of our financial accounting education started by learning how to read and analyze three key financial statements: the balance sheet, income statement, and cash flow statement. These documents contain valuable information about your company’s spending, earnings, profit, and overall financial health.
The balance sheet details your company’s assets, liabilities, and owners’ equity for a given period. The relationship between these components is illustrated in the accounting equation, which is used to verify the balance sheet is correct and balanced. Assets should always equal liabilities plus owners’ equity.
The income statement, also called the profit and loss statement, or P&L, shows your organization’s revenue, expenses, and profit, typically on a quarterly or annual basis.
The cash flow statement lists any cash inflows or outflows your organization had for a set period. The lines on the cash flow statement are categorized into operations, financing, and investing activities, and each source and recipient of cash is listed.
Understanding these statements is useful no matter your role or industry because they illustrate the ins and outs of an organization’s finances. This knowledge can be used to inform which projects and investments you pursue and shape how you make an impact on your company’s profitability.