WebFinance, Inc. (2011) defines accounting as a systematic process of “recording, reporting, and analysis of financial transactions”. So, the process of accounting is all about gathering, organizing and analyzing financial data. Such financial data, in its turn, refers to financial transactions that take place when someone sells, buys, invests or borrows. This information is needed for effective management of business or personal financial decisions.
Among the purposes of accounting is providing businesses and individuals with information about their financial performance and situation (QuickMBA.com, 2010). Consequently, since accounting provides such information, it helps us to make effective financial decisions on its basis. Accounting documents help to get a better view of the financial situation and, thus, to perform a better analysis before making financial decisions.
Income Statement, Cash Flow Statement and Balance Sheet
The three major products of accounting are an income statement, a cash flow statement and a balance sheet.
The income statement shows income and expenses of an individual for a specific time period. In terms of personal finance income includes all the incoming cash flows – everything the person earns – wages, returns on investments, and so on. Expenses include the money an individual spends in the process of earning income (i.e. living expenses such as money for food, gas, entertainment). Finally, the income statement shows person’s net income – that is income left after expenses. This information helps to determine whether an individual has a budget surplus or a budget deficit. Budget deficit occurs when expenses exceed income. If income is larger than expenses, then the person has budget surplus, which is a good thing.
The task of the cash flow statement is to show the details of cash flows – where they come from and where they go. It is different from the income statement because the cash flow statement also includes such positions as receiving repayment of a loan, repaying a loan, or investing. The cash flow statement also shows operating cash flows, which occur regularly, cash flows from financing (loan repayments), cash flows from investing, and free cash flows – the money available for investment or other financial decisions.
Finally, the balance sheet shows the overall financial position of an individual in a certain time period. The balance sheet shows assets, debts and liabilities, and the net worth (equity). The value of asset must be equal to the value of debts plus liabilities. The net worth, in its turn, shows the difference between what an individual has and what he or she owns. All this information provides a snapshot of the person’s financial situation and helps to define what to do further.
Free Accounting Software to Help Your Financial Planning
While traditionally accounting is conducted on paper, modern technologies come to ease the life of people and provide electronic accounting solutions. Personal financial software may save much time since it can collect, organize and analyze financial data independently.
Such software is capable of creating all kinds of financial statements and assisting individuals in making financial decisions. It may assist in projecting such things as education and retirement savings, debt and mortgage repayment, income and expense budgeting. Though software cannot, of course, replace human mind, it can save time and money otherwise spent for the services of professional accountants. Therefore, it might be useful to check out such free products as GnuCash, AceMoney Lite or Mint, each of which may become of assistance for managing your personal finance.
References:
- WebFinance, Inc. 2011. Accounting. Investorwords.com. Web.
- QuickMBA.com. 2010. Financial Accounting. Web.
Alla Kondrat - Alla Kondrat+ is a Feng Shui topic editor at Suite101.com, as well as a full time freelance writer and translator (Russian and Ukrainian). ...
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