In accounting, there are three main types of business activity: financing, investing, and operating.
- Financing involves obtaining and repaying funds to finance business operations.
- Investors pay money to the company and in exchange get shares.
- The company will pay shareholders periodically a return on their investment, called dividends, an outflow of cash.
- Companies can also purchase shares that have been distributed, resulting in an outflow.
- The company may borrow money from creditors and owe debt to them, called liabilities.
- Investing activities use the money obtained from financing activities to buy or sell assets to operate the business for the long-term.
- Assets are resources that the company owns, in the short- or long-term.
- They’re referred to as property, plant, and equipment, can be things like new technology or equipment (except inventory).
- Intangible assets refer to things like trademarks or patents.
- These activities normally result in an outflow of cash.
- Operating activities refer to the main day-to-day activities of the business.
- Usually involve making and selling items.
- These activities are the most relevant to investors, since they’re a better predictor of future activities.
- Revenue is money earned by the sale of these goods.