Educational

Importance of cash flow in accounting

Cash flow in accounting is one of the basic statements that any business person deals with on a day to day basis. Cash flow in accounting is known as the statement of cash flow. It tells how much cash has gone out and come into the business. It reports the real flow of cash. All the activities pertaining to a business are categorised into four types viz:

  1. Operating
  2. Investing
  3. Financial and
  4. Supplemental

This knowledge is necessary before learning how to check a cash flow statement. The cash flow statement tells the current flow as per the real exchanges and does not take into account the accruals. Now let us understand various exchanges with the help of examples. Suppose Adam invests cash into his own business. What will happen in the cash flow statement? The cash flow will show cash inflow into business. For Adam, it will be cash outflow. Similarly, every cash transaction will have a double effect. Cash will flow out of one person/business and flow into another person/business. Reading a cash flow statement is this easy once you know how.

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