Hi Readers, hope you have been balancing your balance sheet.
Welcome back everyone to another update on Corporate Financial Accounting (CFA) gist page based on my class experiences. If you missed the Part I and II, kindly check the archive section on this page, thank you.
Couples of more session with Dr Chiemeka Ojiabo proved very useful in further understanding of how company financial statement should be read and understood. In fact, I am closer to becoming a ‘CFAite’ sooner than I thought when I started the EMBA program at LBS on 10th February 2023.
Recall, Part II of this series discussed the process of determining a business event or transaction like bidding for construction contract, pitching to woo investors into a startup business, etc. When a business event or transaction is successful then it becomes an accounting event or transaction which will necessitate making ENTRY into accounting book of the company.
Note that not all business event or transaction leads to accounting event or transaction and therefore, not all business event or transaction will have corresponding entry in the company accounting book for the period. For instance, if pitching exercise meant to woo investors as described above was unsuccessful, then there will be accounting event or transaction and entry cannot be made in the company accounting book even though resources were deployed to make the pitch.
The next step is to determine the nature of accounting transaction that has occurred. Is it exchange of value in terms of cash at hand or in bank (assets), services, goods or is it an accrual for service rendered or received (receivable or payable), etc
Remember, the main accounting equation that was discussed in Part I of the series, that is:
Assets = Liabilities + Owners Equity
An accounting entry can either impact positively or negatively on any of the equation factor above.
After all transactions entries have been completed, then, the accounting officer can start to produce financial summary, trial balance, etc.
These initial financial documents will lead to Financial Statements like Balance Sheet which is the ‘statement of a business’s assets, liabilities, and owner’s equity as of any given date’[1]; Profit and Loss (P&L) statement – ‘a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period’[2] and Cashflow Statement which ‘summarizes the amount of cash and cash equivalents entering and leaving a company’[3].
The three different financial statements defined above (Balance Sheet, Profit & Loss, Cash flow) are the main financial statements for a company to determine the true health of the business – whether it is financial institution like banks, insurance companies, brokerage firms, etc or it is non-financial institution like manufacturing companies, corporations, pension firms, etc.
It is important to mention that level of value attached to each type of main financial statements mentioned earlier is dependent on whether the company is financial institution or non-financial institution. For example, Balance Sheet is very critical to banks, in fact, the bank books must balance on daily basis whereas, for a consumer retail company, Cashflow statement will be of utmost value.
Dear Readers, let me pause here and implore you to check financial statements from your bank and regular mega-mart, which is of priority to the management – Balance sheet or Cashflow statement?
Until next time, remain balanced like balance sheet!
[1] 5 Things to Know About Your Balance Sheet | U.S. Small Business Administration (sba.gov)
[2] Profit and Loss Statement Meaning, Importance, Types, and Examples (investopedia.com)
[3] Cash Flow Statement: What It Is and Examples (investopedia.com)
Data Analytic and Accounting