The 5 essential Accounting principles every FP&A Analyst needs to know
The purpose of each of the three Financial Statements
Memorizing which components on the P&L, Balance Sheet, and Cash Flow statement stand for is not enough.
FP&A Analysts need to understand why companies prepare these three statements in the first place.
Because if you understand their purpose, you’ll better understand how they are being used - without having to rely on rote memorization that may fail you in a critical situation.
The components of each Financial Statement
Depending on the nature of the business, different line items are more important than others.
For example, a consultancy typically focuses most on people-related expenses, while a manufacturing business emphasizes production cost and capital management.
As the FP&A Analyst, you need to be intimately familiar with the P&L, balance sheet, and cash flow line items that matter for your role.
You need to know what they are, the company's goal and strategy to manage each of them, and finally, how to plan and track them.
The Matching Principle
I consider the matching principle the golden rule of accounting because you can use it to predict the likely accounting treatment for even rare and complex transactions.
It’s great to make quick assumptions about the likely accounting treatment while waiting for confirmation from the accounting team. That’s why it’s an essential rule every FP&A Analyst needs to know.
How the Financial Statements interact with each other
P&L, Balance Sheet, and Cash Flow statement interact when a transaction impacts all three statements. Most financial transactions do.
But you need to pay the most attention as an FP&A Analyst when transactions only impact the balance sheet
That’s because our business partners outside of Finance often don’t have the accounting background and may budget their expenses incorrectly as a result.
How to use T-Account Analysis
Non-standard financial transactions can appear quite complex at times, but fortunately, there is a tool to simplify them. That tool is called T-account Analysis.
It’s a way to quickly map out how a financial transaction impacts P&L, Balance Sheet, and Cash Flow accounts. It helps you determine in which period to account for how much of the cost.
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