What Are Basic Financial Accounting Concepts?

Financial accounting preserves business operations in ledgers as financial transactions. A series of these transactions shows business owners, company owners, and investors how a company is doing financially. Financial records facilitate the use of financial ratios to get more details on a business' operations and standing. If any information on these statements or accounting books doesn't match a cash and inventory count, the business or company is forced to scrutinize its operation to resolve the differences.

Cash and Accrual Types of Accounting

Cash accounting is based on cash transactions. For example, if a merchant sells a lamp on credit, he doesn't account for the sale until he receives cash. Once the bank processes the payment and puts cash in his account, he registers the sale. An expense isn't counted on the books until it's paid.
Under the accrual accounting method, the transaction is recorded as soon as it is made. For example, a merchant using accrual accounting records every sale immediately, even if she has not yet received payment. She also records expenses as they're incurred.

Balance Sheet

Current assets are money generating items that can be converted to cash within a year. Checks, money orders, and accounts receivable are included in this category. Non-current assets take longer than a year to convert to cash. This includes buildings, factory, factory equipment, computers, and any equipment the business uses to make money. Liabilities are the company's financial obligations, such as bills. Liabilities that must be paid within a year are current liabilities; those that will be paid over a year are long-term liabilities. Owner's Equity represents money the owners have invested in a company. Total assets on the balance sheet must match the sum of total liability and owner's equity; Assets = Liability + Owner's Equity.

Income Statement

Net Sales is the total sales the business made over their accounting year. "Cost of Goods Sold" represents how much the company spent to make these goods. "Gross Income" represents the total amount of money the company made during the accounting year. "Selling General and Administrative Expenses" are what the company paid for operations not directly involved with making the goods. "Operating Income" represents the profit the company made from its operations. "Income Before Taxes" is the total profit the company has before taxes. "Income After Taxes" is the money the company has left over after taxes are paid. The basic concept behind the Income Statement is represented by the formula; Revenues - Expenses - Taxes = Net Income.

Cash Flow Statement

This statement represents cash entering and leaving a business operation. This statement measures cash movement with operations, investing, and financing. This statement starts with the net earnings for the fiscal year that just ended. It lists additions to, and subtractions from, cash. The additions are added to the net earnings to come up with a new sum. The cash subtractions are subtracted from this new sum, and the results are listed as "Net Cash from Operations." Cash flow from investment is added to this new net amount. Cash flow from financing is subtracted to provide the new cash flow for the fiscal year that just ended.

Time Frame

Financial accounting activities take place every time a transaction occurs. For example, if a gallon of milk is sold, inventory is reduced by one milk gallon. Cash, or accounts receivable, increases by the value of a gallon of milk. Financial statements like the Cash Flow Statement, Income Statement, and Balance Sheet, are done on a quarterly and annual basis. There are four quarters in a fiscal year.

Resources

• Investopedia Dot Com has details on Financial Accounting.