Accounting vs. Economic Cash Flow

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Accounting is the method used to track changes in cash flow. It is a systematic approach by which financial information is recorded and analyzed. Economic cash flow refers to the income or expenses generated by participating in income-producing activities. Economic cash flows generate both revenue and expense streams. Revenue and expense stream details are described in accounting terms and recorded in a company's statement of cash flows.

Identifying Economic Cash Flow

Economic cash flows are revenue or expense streams that affect changes within a cash account over a specified period. Economic cash flows arise from three main activities: business operations, investing or financing. Cash flows may also be derived from donations. Inflows and outflows are the only two types of economic cash flows. These basic facts concerning cash flows are true for both business and personal finance.

The Statement of Cash Flows

Economic cash flows can be found on a company's statement of cash flows. This statement records the total amount of cash generated and used within a given period. This total figure is calculated by adding the amount of non-cash charges (usually depreciation) to the amount of net income after taxes. Economic cash flow can be identified for a business as a whole or for a particular project. The statement of cash flows provides insight into a company's financial strength.

Accounting Basics

Accounting is the systematic recording and analysis of financial transactions. Accounting methods are used to monitor economic cash flows but not to change them. Accounting is the process of gathering and communicating financial information. Information comes in the form of financial statement, which describe the terms of the economic resources under management. Accounting involves bookkeeping and auditing. Modern accounting authorities use a standard set of rules for reporting financial information. Modern accounting standards are referred to as the Generally Accepted Accounting Principles.

Accounting and Economic Cash Flow Are Related

Accounting refers to the method used to track the changes in cash flow over a given period of time. Although cash flows may change, the system of accounting used to track the changes remains consistent. Consistency in an accounting system enables you to analyze financial efforts and compare changes in economic cash flow against a given standard. The system of accounting used to record cash flows does not affect the amount of cash flowing in or out of a company. Accounting simply relays the transactions involving economic cash flow. Consistency in accounting methods provides transparency in terms of the reporting of cash flows in financial statements.

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