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Understanding Financial Accounting: A Critical Step in Business Success

Financial Accounting 101
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Business Owner in office working

Financial Accounting is what we simply refer to as “accounting.” It commences with basic

double entry bookkeeping and progresses to the completion of a suite of statements that include the Income Statement, Balance Sheet and Cash Flow Statement. Financial

accounting – as represented by these key statements – is geared towards the needs of external entities such as investors, creditors and tax authorities. Importantly, financial accounting is governed by generally accepted accounting principles (GAAP), which ensures that performance interpretation and company by company comparison is done on an “apples to apples” basis.

Financial statements are historical in perspective; they reveal what the company has done up to a point in time and, serve two critical purposes:

  1. Indicate the degree to which the company is profitable, using the Income Statement

  2. Reveal the degree of solvency, that is, the company’s ability to meet its financial obligations. This is reflected on both the Balance Sheet and Cash Flow Statement

Because financial statements provide insight into a firm’s efforts at achieving two of its most important business goals, every well run business should regularly generate an Income Statement, Balance Sheet and Cash Flow Statement. And, business owners and managers ought to pay close attention to these financial statements, as they

are indispensable to sustained success.

COVID-19 and a deep recession have added an additional layer of complexity for businesses of every size – see an earlier article here. Recently, management consulting firm McKinsey, in a report titled, “When Nothing is Normal: Managing in Extreme Uncertainty, highlighted the need for leaders to “respond quickly to the rapidly shifting environment and sustain their organizations through the trials ahead,” knowing that we might be in crisis mode for a long time. None of this pivoting is possible without having a baseline of how your company is doing; having a grasp of the information provided by the financial statements will significantly help.


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