Four basic financial statements exist: the balance sheet, the income statement, the retained earnings statement and the cash flow statement. Each of the latter three statements details one aspect of the business's performance across a period of time. The cash flow statement is used to detail changes in the business's cash and cash equivalents due to its activities in the period. Because cash flows are changes in the asset accounts of cash and cash equivalents, cash flows are recorded using the same debit and credit rules as other assets.

Debit and Credit

Each transaction has one part that is recorded as a debit and one part that is recorded as a credit. For example, if a business purchases supplies using $200 in cash, that is a debit of $200 in supplies and a corresponding $200 credit in cash. Debit means that the transaction is recorded on the left side of the ledger, while credit means that it is recorded on the right. In general, assets and expenses are debited when they increase, while liabilities, equities and revenues are credited when they increase.

Cash and Cash Equivalents

Cash and cash equivalents tend to be grouped together for most purposes, including being counted for cash flows. Cash equivalents are short-term and highly liquid financial instruments that can be sold for cash with minimal loss of value. Cash and cash equivalents are grouped together because they are the two most liquid assets available to the business. Because both are assets, both are recorded as debits when increasing and recorded as credits when decreasing.

Cash Flows

Cash flows are changes in cash and cash equivalents. A cash inflow means the business's cash and cash equivalents are increasing, while a cash outflow means the same accounts are decreasing in value. Cash flows are organized on the cash flow statement into three categories based on the nature of their source transactions -- whether they be operating, investing or financing activities.

Debit and Credit Rules For Cash Flows

Operating activities are related to the business's normal revenue-producing activities. Investing activities are related to changes in its long-term assets. Financing activities have to do with a business's dealings with its shareholders and long-term creditors. Regardless of the source of the cash flow, a cash inflow is indicated by a debit to cash and cash equivalents, while a cash outflow is shown as a credit to the same. For example, if a business purchased equipment for $20,000, that is a $20,000 debit or increase to equipment and a corresponding credit or decrease of $20,000 to cash and cash equivalents. In much the same manner, if that business received $10,000 in cash as investment from its shareholders, that is a $10,000 debit to cash and cash equivalents and a corresponding credit to contributed capital.