Accounting equation 2

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	Accounting: The Accounting equation & Balance Sheet

External Transactions - Cash Flow

Financial accounting is predominantly concerned with the analysis, coding, recording, aggregation, and presentation of information about the company's commercial transactions which result in cash flows to or from the company. In most companies the bulk of external transactions involve purchasing and selling in the course of trade. Although some organisations deal in cash, the vast majority buy and sell on credit, and settle up in cash at the end of the month (or so). These trade credit transactions, establishing trade debtors and trade creditors, are recorded in sections of the bookkeeping system still termed the sales (or debtors') ledger and the purchases (creditors' or bought) ledger. Other external transactions occur in smaller numbers and are less regular. These are all dealt with in the nominal ledger.

Whereas the trading activities result in cash flows in and out of the company in a fairly short time cycle (the working capital cycle) the funding of the permanent assets of the company that provide the facilities used to support the operational activities operates on a much slower or indefinite cycle (the capital investment cycle). Trading activities seek to earn an operating profit, while investments seek to earn an adequate financial return and ensure the sum invested is secure. The distinction between short-term and long-term is significant in all areas of finance and economics and it is something that we shall return to frequently. (see Cash Flows diagram - Part 1).