Corporatefinanceinstitute com 1 The Corporate Finance Institute Accounting For more eBooks please visit

What is Bookkeeping?
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corporatefinanceinstitute.com
6
The Corporate Finance Institute
Accounting
In order to properly implement bookkeeping, companies need to first 
choose the accounting method they will follow. Companies can choose 
between two basic accounting methods: the cash basis of accounting or 
the accrual basis of accounting. The difference between these types of 
accounting is based on when you, the company, actually record the sale 
(money inflow) or purchase (money outflow) in the books. 
Definition
Example situation: You 
purchased 100 units of a product 
and will pay for it next month.
Cash Basis
Record transactions only when 
cash is actually received or paid
No transaction recorded
Accrual Basis
Record transactions when it 
occurs, even if cash is not received 
or paid 
Transaction recorded through 
an accounts payable (liability) 
account. More later.
Accrual vs Cash Basis 
of Accounting 

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corporatefinanceinstitute.com
7
The Corporate Finance Institute
Accounting
There are many different accounts that are used to keep track of 
financial transactions. The main general accounts are as follows:
•
Asset
•
Liabilities
•
Shareholder’s Equity
•
Revenue
•
Expense
Assets, liabilities, and shareholder’s equity are the main accounts in 
a financial statement called the balance sheet, or the statement of 
financial position. The balance sheet shows a company’s financial 
position at a certain point in time. Assets include everything that the 
company owns, whether it be cash, inventory, buildings, equipment, 
and automobiles. Liabilities include everything that the company owes 
to others at a future date, such as bank loans, vendor bills, etc. Finally, 
shareholder’s equity includes claims that owners have on the assets 
based on their portion of ownership. A common equity account is 
common and preferred shares. 
Revenue and expense accounts are the main accounts seen in 
an income statement. The income statement shows a company’s 
performance for a certain duration in time, usually its fiscal year (from 
January to December). Whenever bookkeepers record a transaction, 
multiple accounts are affected, whether they are different accounts 
(assets and liabilities) or within the same general account (changes in 
two different asset accounts).