Accounting Tips for Small Businesses
When running a business, it is necessary to have four financial statements. These are mandated by the generally accepted accounting principles, also known as GAAP. They are the balance sheet, income statement, statement of retained earnings, and statement of cash flows.
Balance Sheet
This is a statement of your financial position at any point in time. It is based on a very simple formula: Assets = Liabilities + Equity.
Assets can be current or fixed. Some examples of current assets include cash, notes receivable, inventory, and prepaid assets like prepaid rent. Fixed assets are not liquid and they include land, buildings, and equipment.
Liabilites are the portion of a firm’s assets that are owed to others. They can be short term or long term. Some current liabilities are accounts payable, interest payable, wages payable, and taxes payable. Two long term liabilities are mortgages payable and bonds payable.
Equity is what remains after the creditors have been paid. It is called owner’s equity in a sole proprietorship and shareholders’ equity in a corporation.
The balance sheet is useful when figuring out whether a company has enough assets to meet its obligations. Another use for the balance sheet is seeing progress over a period of time.
Income Statement
This financial statement shows the results of the business’s operations during a period of time, called net income from operations. The equation is: Net Income = Revenue – Expenses. The net income for the company however, is: Net Income = Revenue – Expenses + Gains – Losses. These gains and losses can be through sale of land or stock, as long as those are not part of the company’s stated operations.
Statement of Retained Earnings
This equity statement explains the changes in retained earnings. Those appear on the balance sheet and are most frequently influenced by dividends and net income. The statement of retained earnings uses information from the income statement and provides information to the balance sheet. The formula is: Beginning Retained Earnings + Net Income – Dividends = End Retained Earnings.
Cash Flow Statement
Because GAAP requires accrual accounting, a company may be making a profit but not have enough cash. This financial statement is utilized to determine a company’s ability to pay the bills. This statement shows sources of cash, uses of cash, and the change in cash balance. It breaks all of the transactions into three major kinds of activities: operating, investing, and financing. The information for the cash flow statement comes from the beginning and ending balance sheets as well as the income statement.
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