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Accounting Records: Definition & Types

Instructor: Kimberly Winston
Everyone likes to know how they are doing financially. In this lesson, you will learn about accounting records, tools that help businesses understand their financial performance.

What are Accounting Records

When you want to know how well you're doing financially, you probably look at your bank statement, W-2, pay stub, or any other documentation that shows your financial performance and status. When a business wants to know how its doing financially, it turns to accounting records.

Accounting records are any type of documentation relating to the financial performance of a company, and they can be used to analyze financial performance or as evidence in case of an audit. As a general rule, accounting records should be kept at least seven years for auditing purposes.

While tax statements, as well as records of checks and other transactions, are part of a business' accounting records, they act more as supporting documentation. This lesson will discuss three types of accounting records: the income statement, balance sheet, and statement of cash flows.

Income Statement

An income statement, also known as a profit and loss statement, shows all income and expenses of a business for a specific period of time. The income statement is divided into two sections:

  • The operating section shows income and expenses that are related to regular business operations. For instance, for a business that sells flavored popcorn, income and expenses incurred producing the popcorn would be included in the operating section.
  • The non-operating section of the income statement shows income and expenses for things not related to regular business operations. For instance, if the flavored popcorn business sold some of its old equipment, the transaction would be listed on the non-operating section.

Balance Sheet

A balance sheet is a financial report that list the assets, liabilities, and equity of a business. It is also known as a statement of net worth or financial position. Just as the name states, the three sides of the balance sheet must balance out, and the following is the formula to do so:

  • Assets = Liabilities + Equity

Let's apply this to an example for a better understanding. The owner of the flavored popcorn business, Kendall, wants to expand her business. She decides to take out a small business loan for $50,000, which would be listed under liabilities because it is a loan and she has to pay it back. It would also be listed under assets because it would be cash on hand for her to buy new equipment or open a new location. The $50,000 added to both the assets and liabilities balance each other out. Once Kendall started making monthly payments on the loan, her liabilities would decrease and so would her assets by the same amount. Any profits from expanding the business would be listed in the equity section as well as cash in the assets section, creating a balance.

Statement of Cash Flows

A statement of cash flows shows all monetary transactions going into or out of a business. It is different from an income statement, because it shows only current transactions. It shows income that has been received and expenses that have been paid. An income statement shows current and future income and expenses.

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