Understanding Double Entry, Funding, and Financial Statements
The Method of Double Entry
The method of double entry affects movement in at least two accounts, representing a movement and a debtor-creditor relationship. Double entry is the essence of current accounting and an integral part of the equity equation. It’s based on the economic fact that all originates in another fact of equal value but opposite in nature. For example, when lending money, the recipient has an obligation. Things do not just happen; each value is the result of an action or economic fact. When I get money for a sale, I am also stripped of property; I deliver something to the other party that gives me some money.
Types of Funding for a Company
Sources of funding:
- Personal savings
- Friends and relatives
- Banks and credit
- Investment capital
Short-Term Financing
- Trade credits
- Bank notes
- Credit lines
- Trade accounts receivable and inventories
Long-Term Financing
- Mortgages
- Stocks
- Bonds
- Financial leasing
- Microfinance
- SME credit
Essential Accounting Books
Cash Book
This accounting book is used for different purposes. In finance, it helps to know how much is available for transactions. It provides evidence for tax payments. In accounting, it keeps a record of charges and ordered payments of cash and cash equivalents. It is a very important book for managing money.
Purchase Book
This book records purchases and expenses daily, related to the company’s activity, with the following details: Number of annotation, date, name and surname or company dispatcher, and value concept, with separation of VAT.
Sales Book
This book records daily, in chronological order, all sales and revenues of the activity, with the following breakdown: The number of annotation, date, file number, invoice number or equivalent, concept and value, with separation of VAT payable or compensation received under the special scheme of agriculture, livestock, and fisheries.
Understanding Financial Statements
Balance Sheet
The balance sheet is the financial status of a company at a given time. To reflect this state, the balance sheet shows assets (what the organization owns), liabilities (debts), and the difference between them (equity).
Income Statement
A financial report showing the amount of profit earned or loss incurred during a given period. This includes the total income from principal activities of the entity and the costs incurred to achieve them. The statement of income or profit and loss statement supplies information for the causes of the profit attributable to the period as a result of either the profit or loss. The items that comprise it are usually classified as ordinary and extraordinary results.
Assets, Liabilities, and Capital
Assets and liabilities are like the columns of a balance sheet. Assets are what you have, whether in cash, accounts, or machinery. Liabilities are what you owe, whether accounts payable, credit, etc. This part is also formed by the equity, which is composed of the capital of the company, current earnings, and profits of the previous balance. The capital is the contribution that the owners or investors give to the company, generally with what the company starts, whether monetary or physical (infrastructure, machinery), but always enhances monetary value or is recorded.
Accounting in the Company
In any company, large or small, of any kind, three factors are necessary to carry out its activity: people, capital, and labor. The people factor is represented by the owners, administrators, and all employees who work in the company. The capital comprises the contributions made by the owners of the company and could be represented by cash, merchandise, machinery, furniture, and other goods. Labor is the activity carried out by people to achieve the goal of the company, which may be the production of goods, sale of goods, or a provision of a service.