Statement of Cash Flows

The third financial statement that Joe needs to understand is the Statement of Cash Flows. This statement shows how Direct Delivery’s cash amount has changed during the time interval shown in the heading of the statement. Joe 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 Direct Delivery’s balance sheets and income statements.

The three financial reports that Marilyn introduced to Joe—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.

Marilyn now explains to Joe 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 Joe’s accounting system, he will need to make a detailed listing of all the names of the accounts that Direct 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, Joe will find that the chart of accounts will help him select the two (or more) accounts that are involved. Once Joe’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. Joe 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 Direct Delivery’s transactions will involve a combination of two or more accounts from the balance sheet and/or the income statement. Marilyn lists out some sample accounts that Joe will probably need to include on his chart of accounts:

Balance Sheet accounts:

  • Asset accounts (Examples: CashAccounts ReceivableSuppliesEquipment)
  • Liability accounts (Examples: Notes PayableAccounts PayableWages Payable)
  • Stockholders’ Equity accounts (Examples: Common StockRetained Earnings)

Income Statement accounts:

  • Revenue accounts (Examples: Service RevenuesInvestment Revenues)
  • Expense accounts (Examples: Wages ExpenseRent ExpenseDepreciation Expense)

To help Joe really understand how this works, Marilyn illustrates the double-entry system with some sample transactions that Joe will likely encounter.

Balance Sheet – Liabilities and Stockholders’ Equity

(B) Liabilities The monetary record reports Direct Delivery’s liabilities as of the date noted in the heading of the asset […]

Sample Transactions #2 – #3

Sample Transaction #2 Marilyn illustrates for Joe a second transaction. On December 2, Direct Delivery purchases a used delivery van […]

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