Cash flow statements and beyond

The double-entry bookkeeping system  records the business's assets, expenses, liabilities, capital and revenue. From time to time, a business needs to summarize its financial position by comparing its revenue with its expenditure over a specific period, in a report known as an income statement, and by summarizing its assets and its liabilities (and therefore its capital) at the end of that period, in a report known as a balance sheet.

What must be understood at the outset is that these two key financial reports are accounting summaries - and must therefore comply with the key accounting principles. It could be argued that all a business

needs to understand its financial position is a summary of its cash and bank accounts - a cash flow statement. Many individuals, after all, look at their bank balance and the amount of cash in their purses or wallets as a gUide to how affluent they are. However, for a business to understand fully its financial position it is also vital to know:

• how much is owed to or by the business by customers, suppliers and lenders

• the values of unsold inventories of goods

• whether all the expenses for the period have been included

• whether some of the expenses paid in the period relate to a future period

• whether non-current assets have lost value during the period

• how much profit or loss has been made

• what overall assets and liabilities the business has accumulated, not just those bought in the current period.

None of this information would be disclosed by a cash flow statement, but would be shown within either the income statement or balance sheet.