Business Knowledge

Financial Accounting: Core Concepts

Accounting 101: The Financial Story of Your Business

Every business has a financial story. Here’s how to read it.

1. The Golden Rule: The Accounting Equation

  • Assets = Liabilities + Equity
    • Assets: What you OWN (cash, buildings, equipment).
    • Liabilities: What you OWE (loans, bills).
    • Equity: What’s left for the OWNERS (your stake).
  • Why it matters: This equation always has to balance!

2. Cash vs. Accrual (How you count)

  • Cash Basis: Records money only when it’s received or paid.
    • Simple for very small businesses.
  • Accrual Basis: Records money when it’s earned or incurred, even if cash hasn’t moved yet.
    • Required for most businesses (GAAP/IFRS).
    • Gives a truer picture of performance.

3. The 3 Financial Reports (The Story’s Chapters)

  • Income Statement (P&L):
    • “Did we make a profit?” (Over a period of time)
    • Revenue - Expenses = Profit.
  • Balance Sheet:
    • “What do we own and owe RIGHT NOW?” (A snapshot in time)
    • Assets = Liabilities + Equity (always!)
  • Cash Flow Statement:
    • “Where did the cash come from, and where did it go?” (Over a period, split into Operations, Investing, Financing)
    • Crucial for checking if a profitable business has enough cash to pay bills.

Your Action:

  • Look at your business’s latest financial statements. Can you identify the numbers for each of these core concepts?