A Brief Guide to Engineering Financial Calculations: Introduction to Financial Statements
Financial statements document the answers to three key questions about a business:
- How much did we make, and how much do we keep?
- How much do we have, and where did it come from?
- Where did our money go?
There are four types of financial statements:
- Income statements
- Balance sheets
- Cash flow statements
- Statement of retained earnings.
Financial statements are part of a chain that turns data into information analyzed in context for informed business decision making:
- Bookkeeping tracks all the transactions in a company
- Accounting assembles all the entries into different financial statements
- Analysis consists of interpreting Financial Statements.
Chronological journal entries are transferred to ledgers, which are the books of final entry, in the following categories:
- Equity (also called shareholders’/owners’ equity or capital)
Double-entry accounting tracks transactions by where the money comes from, and where it goes. There are two types of transaction entries, debits and credits.
- An increase in an asset account
- A decrease in a liability account
- A decrease in an equity account
- A decrease in a revenue account
- An increase in an expense account
- A decrease in an asset account
- An increase in a liability account
- An increase in an equity account
- An increase in a revenue account
- A decrease in an expense account
The process for doing double-entry bookkeeping is as follows:
- Figure out what the two halves of the transaction are
- Decide for each part of the transaction, whether it makes each account go up or down
- Check to make sure that one is a credit and the other is a debit.
The trick category is assets. The simple way to think about when an asset account goes up it is a debit is to remember that to make that account go up you had to use some money to do it (a use of funds). Conversely, when an asset account goes down, it is freeing up some money.