Accounts

When you run a business, there are many financial events that take place in any given day. Without an organized way to track this information, it will be impossible to tell how well the business is doing. Accounts also known as chart of accounts act like containers for similar transactions. For example, if a customer comes in to make a sale, a record is created and stored in the related account. Recording the transaction is called making a journal entry. Journal entries are individual accounts of each transaction that take place in the business. Examples of accounts are cash, revenue, wages, notes payable, etc.

General Ledger

Most business have more than one account and need a way to make sense of all the individual transactions in the account. Think about your receipt from the grocery store, each item you buy has a different line (similar to account). The line items are broken into department. These departments are analogous to the general ledger: A general ledger takes like term accounts and organizes them into departments. Below is a general ledger template for 3 accounts namely cash, accounts receivables and supplies. For example all transactions recorded using cash will be organized into the cash ledger.

Financial Statements

General ledgers are good when you need to know how much you have spent and made for a particular type of account, for instance my ending cash balance on my ledger will tell me how much cash I have left. However, it does not give me vital information for my business like how much profit I made or my total business assets. To get this level of information, general ledgers have to be further organized into financial statements. There are 4 main financial statements accountants need to gather vital information about a business and there are:

1. The Balance Sheet
2. The Income Statement also known as Profit & Loss Statement
3. The Statement of Cash Flow
4. The Statement of Changes in Equity

We will be discussing each statement in more details

 

Elements of financial statements

Financial statements are broken down into categories called elements. There are ten (10) elements of the financial statements namely:

• Assets
• Liabilities
• Equity
• Investment by owners/ Contributed capital
• Distributions to owners
• Revenues
• Expenses
• Comprehensive income
• Gains
• Losses

 

Elements of Financial Statement: Income Statement and Balance Sheet