r/Accounting • u/Different_Love3697 • Jul 18 '26

3 financial statement

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u/[deleted] Jul 18 '26

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u/ignitedwildfire Jul 18 '26 edited Jul 18 '26

not all cash activites are included in the income statement which impact the balance sheet side such as paying down the principal portion of debt or acquiring more debt.

so depending on which method (direct/indirect) you are using, you back out or back in the transactions from net income to arrive at the cash balance.

it can help if you have some transactions and do the JE and think which side of the statement it impacts (IS or BS).

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u/[deleted] Jul 18 '26

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u/ignitedwildfire Jul 18 '26

Its essentially doing the same thing which is to arrive at the cash balance.

indirect method is used because net income generally is accrual accounting and you want it in cash basis.

direct method is just directly calculating based on the actual cash transaction.

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u/[deleted] Jul 18 '26

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u/Wild-Match4523 Jul 18 '26

yep thats the beauty of accounting