In every economically. relevant event, money does not come from the sky. There always is a well-defined source (credit) as well as a sink or application (debit). Every accounting transaction has equal amounts of debit and credit.
This is the double-entry accounting method. The main merit of this method is to allow perfect demonstrations of which has been made with the entity's money. It is self-verifying to some extent, because debit amount must be always equal to the credit amount. (For "entity", we mean a personal or business of any kind).
At least for me, money source or origin always comes first to my mind, before application or sink. In accounting, by convention, debit comes before credit, and this order feels 'inverted' to me. For some reason, Fra Luca Pacioli (the creator of double-entry accounting) thought first about where to spend his money, and after where to get it from :)
It is not the only method available. 'One-legged', simpler schemas are also popular and they are useful to keep things booked to some extent. The most common is the cashier book. The cashier is always at one side of every journal (either debit or credit). It allows for control of the cashier money, as well as revenue and expenses (if all of them are paid or received by the cashier).
But it does not allow non-cash assets to be controlled. Also, the cashier will end up having a lot of non-cash items in the balance: checks with future date (common in Brazil), money advances to employees, etc. Still, it may be enough for a very small business, e.g. boy scouts selling lemonades.
Another alternative is total control for asset accounts only (included liabilities, that are negative assets). It helps to put non-pure-cash assets outside of the cashier balance, as well to control liabilities. It seems that MS-Money and other personal accounting software follow this approach.
Asset accounts are only the 'positive' part of total assets: goods and rights. It is not difficult to imagine them: cash, bank account with 'blue' or 'green' (positive) balance, real estate, automobile etc.
In a balance sheet, asset accounts are listed in inverse order of liquidity. For example, it is easier to cash out a bank account than to sell a real estate, so the bank account comes first in report. Traditionally, cash is always the first account here (even though modern life sometimes makes the credit card more 'liquid' than money!).
When you sink money in an asset account, its balance will grow, so it has a debit normal balance. Positive balance in a bank account is a debit (DB) balance.
If you go to the bottom of the assets, where the less liquid accounts lie, accurate evaluation gets more and more difficult. A bank account has a perfectly known value, while a real estate has a floating market value etc.
At the very bottom of the balance report assets, there is a esoteric account group called 'Deferred acquisition costs' (DAC). Deferred means delayed. Such accounts essentially hold spent values that can not be reimbursed (i.e. liquidity is zero), but we do not want to recognize them as expenses, yet. So, instead of going directly to expenses, the money spends a jail time as a DAC.
A good example is a car insurance. You pay a full year of insurance in advance, but it would not be correct to put the total expense in the month of payment, because the insurance covers all the months of the year. The correct entries are:
Of course, liquidity of DAC are essentially zero; do not expect to be reimbursed if you cancel the car insurance. Since it is an account involved in screwball/esoteric/hard to evaluate transactions, it is often used in accounting frauds, mainly to hide losses and big expenses that are difficult to explain to shareholders :)
By the way, since we have mentioned monthly accounting of insurance expenses, we should introduce two different approaches of recognizing revenue or expenses: accrual and cash. Accrual basis is mandated by law in Brazil; it dictates that incomes are considered as such when the cause took place. Example: revenue has the date of the sell of the good. In cash basis, the revenue has the date of the effective money receipt.
If you take a look at the car insurance example once more, we can see that my journal suggestions belong to the accrual accounting. In cash basis, the expense would simply fall entirely in the month of payment, rendering the DAC accounts unnecessary.
Which approach is best? It depends. Cash basis is far less bureucratic (and therefore cheaper to run) but accrual basis produces more consistent account reports. Reports from different periods will be comparable. With the cash basis, it is almost impossible to generate a decent monthly balance sheet report (e.g. December report would show a huge loss because of end-of-year expenses like bonuses -- here in Brazil there is a mandatory bonus for employees, the "13th salary"), while in the accrual accounting this is straightforward.
Besides being non-bureucratic, cash basis has the merit of producing more conservative financial statements: if a large share of clients do not pay their receivables at the due date, these receivables will not appear as revenue prematurely. A lot of people feel more comfortable this way. The accrual basis, that mandates that the revenue is accounted in the event of sale, could produce false profits that would just turn to losses in the next period. Receivables are also a sure source of accounting frauds: it is incredibly easy to claim huge sales that will never materialize cash.
It is important to say that accounting conservative principles demands that we always recognize liabilities as soon as possible, to have a realistic (or pessimistic) view of our net assets. Even if you use the cash basis, if you buy something to pay in 24 monthly payments, the full liability should be accounted in the day of the bought.
Liabilities are the negative assets, that is, everything the entity (you or your business) owe to others. It is not incredibly difficult to imagine dues and credit card bills. Liabilities are easy to understand, and its accounts are listed in inverse order of term (short term comes first). It is common to group them in 2 big sub-groups: short-term (due in less then one year) and long-term (due after one year).
If you borrow money to buy a car, then the journal entries will be
DEBIT (sink): Permanent Assets: Vehichles $1000 CREDIT (source): Short-term Liabilities: Bank XYZCredit entries make the liability to grow, so the liability account has a credit normal balance. To solve the debt, you would probably do it with a check:
DEBIT (sink): Short-term Liabilities: Bank XYZ $1000 CREDIT (source): Bank ABC Account #34859We forgot to talk about the interests. We have not explained the expense accounts yet, but it is a good opportunity to begin. If you fully paid the debt including interests, the entries would be
DEBIT (sink): Short-term Liabilities: Bank XYZ $1000 DEBIT (sink): Expenses with Debt Interests $1.23 CREDIT (source): Bank ABC Account #34859 $1001.23
A funny thing about bank accounts. When you deposit cash on your bank account, it does not go to a vault, indeed it is lended to other people (sometimes to yourself ;). Your physical money is gone, but now the bank owes you that deposit. You can reclaim this debt anytime by cashing out or cutting a check (provided that the bank did not go bankrupt ;))
This is why your positive balance bank account has a "CR" in the bank report spitted by the ATM. Because this ATM report is a (modified) ledger taken directly from the bank's accounting system, and it reflects your account in the point of view of the bank. For the bank, a client account is a liability. Liabilities have credit normal balance.
Of course, in our balance, the bank account is an asset, therefore it has a debit normal balance (debit = positive balance). It is another simetry of the double-entry accounting: when two separate entities exchange money or goods or rights, the same event will necessairly create a debit journal at one entity and a credit journal at the another, and sum of debits equals to sum of credits even considering the universe of entities!
As we saw, every penny must have a source. An entity can increase its assets only by three ways: making revenue, borrowing money (liability), or then receiving an investiment from a partner. This last source is the entity's equity, also called net assets or fund balances.
A lot of accountants (here in Brazil, most of them) classify equity as a sub-group of the Liabilities. For them, equity is still a debt, albeit extremely long-term and without interests. Personally, I prefer to have the equity accounts separated from the Liabilities (USA reports also seem to follow this convention).
As well as liabilities, the equity has credit normal balance: its balance increases when it is used as source of money.
In a balance sheet good to be a financial statement, or in a business that has just opened but not operated yet, the equality ASSETS = LIABILITIES + EQUITY is true. If the accountant positioned equity inside liabilities, the equality is even simpler: ASSETS = LIABILITIES.
Note that, if liabilities are bigger than assets, the equity must be negative for the equations to be true - and a negative equity is not a comfortable situation.
Equity could also be understood as the conservative sale price for a given entity (e.g. a business). This price could be taken seriously if the ROI (return of the investiment), that is, the earn you get proportional to the equity, is approximately equal the base interest of the economy (the ROI you get when you buy government bonds). A healthy business will yield a lot more ROI than government's bonds, so the sale price will be well above the bookkeeped equity.
Talking a bit more about ROI and interests. When I said that the equity is a interest-less debt, I lied a bit. A partner or shareholder cannot demand an interest, but he certainly expects a good return on that investiment, otherwise he will put his money somewhere else.
Note that the sale price of a business depends on the base interest of the economy. Government bonds are by definition the safest investiment of a given country, since the government is the least probable entity to go bankrupt (since it can always raise taxes etc.). Small oscilations in the base interest have huge influence in entities sale price, and therefore the price of the shares negotiated in the market. Worse: if the government pays a high interest, less people are willing to invest in private businesses. This should not be a problem in USA where the base interest is 2.5% per year, but it is certainly a problem in Brazil where the government pay 17% per year. It is very difficult for a business to yield 17% of profit over equity.
Public administration accounting (the Brazilian one, at least) has the fun detail of *not* having no assets or liabilities. The rationale is because cities and states "own" certain goods as streets, rivers, air space etc. but such goods can not be sold, so they don't have a market value. In the other hand, such half-hearted accounting explains why the government is so reckless in money administration :)
Income is creation of new money for the entity. This "creation" is not money fallen from the sky, but convertion of human work into earnings. This work can be revenue for sale and services, interests paid for borrowed money, merchant profit, rents etc.
In public accounting, the sale of a good is accounted as equity revenue. In a conventional accounting, such sale is a simple conversion of one asset (real estate) into another (money). Only the difference of the bookkeeped real state value compared to the money actually received, will be accounted as net income or expense.
Expense is the destruction of an entity's asset.
Note that expenses do not occur exactly when you spend money on an object, but happend when this object has been used until it loses resale value. Before that, such object should be bookkeeped as an asset.
Extreme example: you buy a roll of toilet paper for $2. It goes to an asset account. While it is being used (keep measuring how many inches you get from the roll) the proportional part goes from the asset to the expense. When the roll is empty, all the $2 should have been gone to expense, since the original asset has been exhausted.
Obviously, no one would bookkeep every toilet paper roll through assets, because the only possible fate of this good is the trash. It is more straightforward to register such expenses using the cash basis i.e. in the moment of the bought.
Buying of services in general, since they are completely immaterial, have no chance of becoming assets: go straight to expenses. Really? A service that is delivered in a long time frame, but has been fully paid at the beginning, would overload the balance of the payment month (or year). To avoid distortions, such expenses can transit via DAC (we already talked about that when discussing car insurances).
Another point in expenses is that there is a difference between cost and expense. Cost is the strictly necessary disimbursment of money to generate the revenue (e.g. a certain number of Kilowatts/hour to make an aluminum beer can). Expense is the non-strictly-necessary disimbursement (toilet paper for the workers).
In public administration accouting, since there is no asset, buying anything, even real estate, is registered as equity expense.
Most times, revenue is not exclusively generated by human work, but implies in delivering a good, perhaps a good just bought before, with minor or no modifications. For example, If I buy something for $100 and sell for $150, which is my revenue: $150 or $50?
The person that bought the good has no clue about my costs. She paid $150, her expense will be $150 for her bookkeepings. But we still need to figure out *our* bookkeeping. When you bought that good, you increased your stock in $100, and reduced your bank account in $100. There is no expense, yet.
DB: Stock of products for sale $100 CR: Bank XYZ Account #123
When the buyer took that good away, it ceases to have value for me, the thing is not here anymore, and cannot be sold twice. *Then* the expense of $100 happened - for instance, in the same spot that revenue happened. To be exact, the loss of $100 was not a expense, but a necessary cost.
There are two ways to account these events: The first, more commonly used, is
DB: Cashier Money $150 CR: Revenue DB: Cost of Goods Sold $100 CR: Stock of produts for saleand the other is:
DB: Cashier Money $150 CR: Revenue $50 CR: Stock of produts for sale $100Both succeed in producing a correct balance report. The second one "feels" more intelligent since we saved one journal, and also because the gross revenue equals the gross profit (i.e. profit after costs but before expenses).
But indeed the first form is better and more often used, for several reasons. It is easier to handle revenue and cost in separate entries. Ofter the granularity of entries is different: I make one journal per order in revenue/cashier side, but just one journal per month in stock/cost, after a physical stock audit. In general, salesmen and warehouse people do not communicate much. In certain entities, the real cost of every sale is even secret information and must not be bookkeeped in a per-order basis. Even in a 100% computerized accounting, often different subsystems take care of revenue and stock/cost, and post their entries in different moments.
A final word is that value of every good, right or service, is entirely explained by the human labor invested in it. If you compare the price of one ounce of gold and one ounce of jewerly, the raw gold will be a lot cheaper. And even the price of gold reflects the difficulties of extraction and therefore the human effort applied in this work. There are no price tags in Nature. Because of that, several essential goods have no resale value e.g. air, solar light etc. Of course, such goods cannot be bookkeeped since they cannot be evaluated.
In accounting, it is not "correct" to say that an account balance is positive or negative, but sometimes we are forced to understand an account balance that way, while explaining it to non-accountants, or because we are ourselves newbies, or because we are composing some report aimed to the general public.
Not all account classes behave the same way when receive debit or credit entries. The following table shows what happens with the balance of different classes: Class Debit Credit ----------- --------- --------- Assets Increases Decreases Liabilities Decreases Increases Equity Decreases Increases Income Decreases Increases Expense Increases Decreases
Assets and expenses have debit normal balance, that is, the balances of such accounts become more 'positive' with debit entries. Telling it another way, applications in that accounts make them more positive, with more potencial to be sources of money in the future. If you deposit money in a bank account, it obviously grows fatter. If you burn money in an expensive restaurant, your expense with food obviously increases.
Liabilities, revenue and equity have credit normal balance; they become more positive with credit entries, that is, when they serve as source of money. A credit card account (liability) gets more positive when you buy on the credit card, because the account measures your credit card bill.
Things start to get really complicated when an account has a 'negative' balance. In general, negative balances are abnormal, sometimes even caused by a mistyped journal. If there is no mistype, and the balance report shows negative accounts period after period, probably that value should be relocated a more appropriate account. Some hints about negative balances:
As we already said, the equation "assets = liabilities + equity" is true in a closed balance. Any journal that deals with revenue or expense will destroy this equilibrium. It is easy to see why: revenue will increase assets and expenses will drain assets, and liability/equity won't follow.
Balance closing procedures will restore the original equilibrium. The sums of all expenses and revenue will be transferred to a Equity account, whose name is generally "Retained Earnings". That is, the net profit, revenue minus expenses, are absorbed as an increase of the Equity; the partners/shareholders got a bit richer. (Of course, if the expenses are bigger than revenue, the loss is absorbed as a decrease in equity.)
At this point, it is advisable to be a "dry run" using pencil and paper, with a fictious entity, beginning with a closed balance, making revenue and expense entries, and then closing balance again.
After balance closing, all income accounts will have balance equal zero, since their balances were transferred to the "Retained/Earnings". This transferring can happen two ways:
The explicit balance transferring (last 2 alternatives) do have some disvantages: 1) The closing entries are "sterile", that is, they have no financial meaning and must be ignored for some reports; 2) Deletes the income balances from the Balance report, leaving only the assets/liabilities, so we need a separate Income Statement; 3) If some correction is made after the closing, the closing entries themselves may have to be corrected too.
But it has a big advantage: allows the accountant to close the balance whenever he wants, even daily if necessary, and the software does not need to be changed for that. By the way, explicit closing is easier to implement in software, and the above mentioned disvantages are also easily defeated in software. For these reasons, I prefer it.
At least in Brazil, the banks must adopt a curious chart of accounts where all income accounts are inside the Equity. That drives the balance to be permanently closed, since assets are always equal to liabilities + equity + revenue - expenses. The banks feed their bookkeeping daily, and thanks to that chart, they can print a balance report every day.
The reason for this is interesting. The Federal Reserve Bank (or equivalent institution) follows and audits such reports *very* closely. If one bank's equity becomes debit (negative), the bank is immediately closed and the owners are sent to the jail (in theory ;). But the main objective here is not to punish, but rather protect the bank clients' rights.
The chart of accounts (COA) is, in a nutshell, a hiearchical structure that holds all possible accounts that can receive entries.
If you want an extremely small chart, you just need 5 accounts: assets, liabilities, equity, revenue and expenses. This micro chart is perfectly correct and every transaction journal will fit in that. But of course the reports would not provide much information about your financial situation.
In the other hand, you can have a extremely detailed chart, so detailed that it is impossible to manage. This is indeed the most common defect of real-world COAs. Every new account will demand some kind of bureucratic control in the real world. The most common victim of account proliferation is the Expenses chapter of the chart.
For example, if I want to control the coffee expense of a world-class enterprise, individually by sector. For the accountant, it is just a matter of creating an account per sector (it may even happen automatically in a well-integrated system). But that would demand controls to monitor the coffee consumption and generate the entries. Maybe it would demand buying custom-built computerized coffee machines, worth 200 years of coffee powder.
Morals is, try not to go too far in account detailing. But, in the effort of shrinking your COA, *do not create* accounts like "Miscelaneous Expenses". Such accounts really help to frame unusual transactions, but this will make you lazy, and you will end up not creating new accounts even when they are really necessary! After some time, your expense profile will change, rendering the original chart obsolete, and 90% of your expenses will be "Miscelaneous"... A good COA has *no* "miscellaneous" accounts.
A COA has normal (non-aggregate) and aggregate accounts. Normal accounts can receive entries. The aggregate accounts can not; they just hold sets of normal accounts (being the "parent" of them), presenting the sums of the daughters in reports. They are useful to get the "big picture" of the finacial situation. Accounting reports published in newspapers have only the aggregate accounts for brevity.
Of course, an aggregate account can be parent of other aggregates, creating a multi-level hierarchy in the COA. The lowest level is always populated by the normal accounts that effectively receive entries.
In order to reveal very clearly this account parentship, it is common to use a structured account code. Just by looking at the code, it is possible to say if the account is aggegate or not, and which hierarchy level it is. Example of 4-level COA:
1 ASSETS 1.1 CURRENT ASSETS 1.1.1 AVAILABLE ASSETS 1.1.1.01 Money 1.1.1.02 Bank account X 1.1.1.03 Bank account Y 1.1.2 RECEIVABLES 1.1.2.01 Client A 1.1.2.02 Client B 1.1.3 WAREHOUSE STOCK 1.1.3.01 Warehouse A 1.1.3.01 Production line A 1.1.4 FIXED ASSETS 1.1.5 DEFERRED ACQUISITION COSTS
It is important not to use too much hierarchy levels, otherwise it becomes too crowded. Five levels are enough even for large enterprises. Four levels should be more than enough for a small business or personal accounting.
The account sequence in the COA will drive several reports, notably the Balance, althrough it is common to manipulate the reports in a spreadsheet, e.g. for newspaper publishing. Asset accounts are in order of liquidity (most liquid in top), liabilities in order of term (shortest comest first), revenue in order of "naturality" - revenues coming from the intrinsic activity of the entity's industry come first, expenses in order of necessity (variable costs first, then fixed costs, necessary expenses, extra/irregular revenue and finally luxury expenses).
If you are a bit confused about how to create your COA, try to get a chart from an accountant or an accounting book; or take a look in published accounting reports (maybe it is time to buy one or two issues of financial newspapers; they bring financial reports of public companies almost every issue).
Accounting is an exciting science; the accountants make it feel boring and repetitive. Here is a typical journal description made by a professional accountant:
PAYMENT AT THIS DATE WITH CHECK TO BUY 500gr PACKAGE OF COFFEE BRAND XYZThat is, he just repeated a lot of information that should be obvious by the journal itself: of couse the payment is "at date"; if it were yesterday, the journal date would be yesterday. Of course coffee must be paid, since it does not fall from the sky; and so on. The expense account leaves (or should leave) clear that it is an expense with food/beverages. A perfectly fine description would be:
500gr COFFEE
But accountants just love long descriptions. To protect their wrists from LER, most accounting systems have "standard entries" - a table of canned journal descriptions that are used very often. The journal description can then be used just to type a complementary information. The former example could then be:
STD ENTRY 643 = "PAYMENT AT THIS DATE WITH CHECK TO BUY " DESCRIPTION = "500 gr COFFEE PACKAGE"
In the reports, the standard entry and the description will be printed as a long description. That way, both the talkative accountant and the poor typist get happy. Personally, I don't like standard entries, because a well-planned chart of accounts should render it unnecessary. But 99% of accountants disagree with me; and indeed the standard entry may be an interesting way to sort and find out entries (e.g. while searching for wrong entries or balance discrepances etc.).
The chart of accounts is one-dimentional, but often we would like to control our expenses in two or more dimensions. For example, we have "expenses with xerox" and "expenses with coffee". If I would like to control such expenses sector by sector in a big business, we would have to create accounts like "expenses with xerox in sector A", "expenses with xerox in sector B"... and our COA gets lengthy enough to round the Earth twice.
To avoid this, we have the cost centers. They are a kind of "parallel COA", more informal and without hierarchy, nor aggregate accounts. Every journal must be bound to an account; but it *may* (optionally) be bound to a cost center. Mostly, only cost-related entries will be bound to cost centers (hence the name).
Going back to the former example, we may have only one account for expenses with xerox in the COA, but every xerox journal will also carry a cost center pointing who spent that amount. If too much money was spent in xerox, it is then easy to pinpoint which sectors/persons made too much photocopies ;)
Of course, cost centers are not a magic bullet against bureucracy. Every expense will still have to be labeled with the correct cost center. Modern xerox machines can do this, by demanding you to type your user code and a password. If your xerox machine is dumb, you will have to trust people to write their cost centers in the xerox logbook (not good if someone is willing to fraud the control to make more photocopies).
The journal is the simplest of the reports. It just lists the entries in chronological order, consuming a lot of paper with almost null value for analysis. You will hardly ever make use of it if you are doing computerized accounting.
But the journal is the only report that has sufficient information to fully recreate the accounting history from scratch. Because of that, printing this report is mandated by law (at least in Brazil). Yes, such demand generates tons of journal books.
The ledger report lists the entries grouped by account, along with the account's balance. If the journal descriptions are well written, the ledger has some value for analysis since it shows what happened with that account, and where its balance came from (particularly important for asset and liability accounts).
In Brazil, law also mandates the printing of all ledgers. It consumes even more paper than the entries. There is no ledger for aggregate accounts.
Balance report is the king of the account reports, since it shows the financial profile of an entity in a nutshell. It is the main report published by public equity enterprises. (IMHO private equity businesses above a certain size should also be mandated to publish balance reports. For example, the branches of car factories in Brazil are all private equity here, and do not need to publish balances, even though the headquarters are often public equity in their countries.)
Each balance line shows an account, with the initial balance, sum of debit entries, sum of credit entries, and final balance. An account without initial balance and without any journal in the period may be left out of the report.
Account Initial Debits Credits Final ------------------------------- ------- ------- ------- ------- BANK ACCOUNT (ASSET) 666 DB 1000 300 1366 DB CREDIT CARD LIABILITY - - 50 50 CR INITIAL EQUITY 666 CR - - 666 CR INCREASE OF EQUITY (IPO) - - 600 600 CR RETAINED EARNINGS - - - 50 CR 1366 = 50 + 666 + 600 + 50 The profit came from these income balances (see Cash Flow): REVENUE 400 CR (went to bank account) TOILET PAPER 250 DB (paid by credit card and check) JUNK FOOD 100 DB (paid by check)
Aggregate accounts will appear in balance, and each of the 4 values is just the sum of the daughter accounts. As a matter of fact, most published balances show *only* aggregate accounts above a certain level, for brevity, since the completely detailed balance of a big entity may have thousands of accounts.
A balance report printed outside the closing period is just a "trial balance", and it is often not "closed", that is, assets have a different value from liabilities. But the published balance is closed, since all revenue and expense final balances have been transferred to the Equity.
Only assets, liabilities and equity will show up in published balance itself. The income accounts (before zeroing) will show up in an accompaining report: Income Statement. In general, a published balance will always be accompained by the P&L report, as well as the "Cash Flow" report, and sometimes more detailed reports about specific accounts that are important to that particular industry.
Balance analysis is a science of its own. It aims to deduce the entity's financial health, present and future, based mostly in the published reports. There are a lot of book written about it, I will not get into details here. I will only mention some things you should pay attention, next time you see a balance in the newspaper:
But after the Enron scandal, investors are not so confident anymore. (By the way, Enron executives went to jail and the corrupt consulting firm went bankrupt, so things happened exactly how they should).
This report shows the income accounts movements. A priori, you could print the Balance just before closing (that zeroes the income accounts) and have the same information.
Published reports will list only higher-level aggregate accounts, for space reasons; and the account order is rearranged to be more meaningful to the industry that the business belongs to. A (shortened) example of P&L report of a manufacturing business:
(1) GROSS REVENUE (2) DEDUCTIONS OF THE GROSS REVENUE (e.g. taxes over gross revenue) (3) NET REVENUE = (1-2) (4) VARIABLE COSTS (i.e. costs that change linearly with production output) (5) CONTRIBUTION MARGIN = (3-4) (6) FIXED COSTS (i.e. costs that do not change regardleess of output) (7) GROSS PROFIT = (5-6) (8) EXPENSES (disimbursements not directly related with manufacturing process) (9) NET PROFIT = (7-8)In particular when the entity took a loss, the above format is useful to spot where the business is spending too much.
"Sterile" entries e.g. balance closing, are not taken into account in this report. Otherwise, all accounts would be printed as zero.
In a balance report, it is difficult to "see" where the financial resources exactly "came from" and where they "went to". Did assets grow by revenue or by increase of liabilities? Did assets shrink by excess of expenses or simply because part of the equity was returned to the partners/stockholders?
It is possible to answer these questions based only on the balance and P&L reports at hand, but you would need to calculate the net balance change for every account. If the Receivables had entries 2500 debit and 2600 credit, it means that the net change was 100 credit (i.e. balance was diminished by 100), so this account was a net *source* of cash for the entity.
The cash flow statement shows exactly these things: lists the net changes of every account. In general, the report is sorted by value, from the largest net debit (application), going to zero and then growing again to the largest net credit (source). Even though the name is "cash flow", non-cash resource reallocations will also appear in the report (e.g. recognizing a liability even if it was not paid in the period).
BANK ACCOUNT (ASSET) 700 DB TOILET PAPER 250 DB JUNK FOOD 100 DB CREDIT CARD LIABILITY 50 CR REVENUE 400 CR INCREASE OF EQUITY (IPO) 600 CR We deduce that our equity was mostly increased by offering stocks (not by old and good revenue) but still most of the stock money is still at home, in the bank account.
Accounts without entries in the period will not appear in the report. "Sterile" entries e.g. equity adjusts and balance closing are not real cash movements, and they are not taken into account here.
Given a sufficiently detailed COA, a cash flow report about non-aggregate accounts is of no use, first because the report will be too long, and second because the individual monetary weight of each account is too small. It does not matter to me if the business spend $10 in pink ballpoint pens, but it would certainly matter if $100,000 were spent in office materials like pens paper etc.
This way, a good cash flow report will list only aggregate account of certain importance, multiplying the weight of large groups of accounts with small individual movement.