14 Common Bookkeeping Questions – Part Two

(This is the second part of a two-part article. For the first part, click here.)

What is the difference between accounts payable and accounts receivable?

Accounts payable are amounts owed by a business to its suppliers for goods or services that have been received but not yet paid for. 

Accounts receivable are amounts owed to a business by its customers for goods or services that have been sold but not yet paid for.

An accounting department can manage the accounts payable and accounts receivable of the business, helping to ensure that bills are paid on time and that customers pay their invoices on time. 

Accountix acts as a middleman for our clients in the AP and AR process; creating workflows to enable business owners to pay their invoices more efficiently, or track their AR more effectively. 

What is cash flow?

Cash flow is the movement of money in and out of a business. Positive cash flow means that a business is generating more cash than it is spending, while negative cash flow means that a business is spending more cash than it is generating (Cash flow forecasting is another “thing” Accountix can help with). 

What is a cash flow statement?

A cash flow statement is a financial statement that shows a business’s cash inflows and outflows over a specific period of time.

What is a Balance Sheet versus a Profit and Loss Statement (aka P&L or Income Statement)?

A balance sheet is a financial statement that shows a business’s assets, liabilities, and equity at a specific point in time.

A Profit & Loss t is a financial statement that shows a business’s revenue and expenses over a specific period of time.

The accounting department prepares financial reports, such as balance sheets, income statements, and cash flow statements, to provide management with an overview of the financial performance of the business.  Accountix helps our clients understand this information during the Advisor meeting (on a monthly, quarterly, or sometimes annual basis).

Why are certain transactions on my Balance Sheet but not on my P&L?

There are several reasons why this may happen; however, transactions that affect a company’s assets and liabilities, such as investments in property or equipment, or the acquisition of debt or credit, would be reported on the balance sheet. Common examples of these types of transactions would include, but are not limited to, a purchase of a fixed asset, personal transactions on company credit cards, and repayment of the principal portion of outstanding debt. 

However, transactions associated with expenses and income, such as payments to vendors, payroll, meals & entertainment, etc. are tied to the P&L and will not be broken down on a Balance Sheet (as they may be on the P&L).  

With Accountix, your Advisor will be able to help you understand your specific situation in more detail.

What is the difference between a general ledger and a chart of accounts?

A general ledger and a chart of accounts are two related but distinct accounting tools that are commonly used in the financial management of a business.

A chart of accounts is a list of all the accounts used by a business to record its financial transactions. Each account in the chart of accounts represents a specific type of transaction, such as revenue, expenses, assets, liabilities, equity, and so on. The chart of accounts provides a standardized way to organize financial transactions and helps ensure that financial records are accurate and consistent.

A general ledger, on the other hand, is a record of all the financial transactions of a business that are posted to the various accounts in the chart of accounts. The general ledger is a central repository of financial data that provides a complete and detailed record of all the financial transactions of the business.

What is the difference between cash and accrual accounting?

Cash-basis accounting will document earnings when a company receives the payment. This accounting basis also categorizes expenses when the expense is paid (versus when it is incurred).  

The accrual method accounts for earnings the moment the revenue is owed to the company, as well as when a company owes the expense. It does not matter when the money enters or leaves the bank account.  It matters when the expense and the revenue are owed.  That is important, as receiving or sending payment is not always immediate. 

Check out this blog post for a more in-depth explanation.

By understanding these common accounting questions and their answers, you can gain a better understanding of how bookkeeping works and how it can benefit your business. Proper bookkeeping can help you monitor your cash flow, understand your business ebb and flow and help you make more informed decisions.  

Accountix is here to help.