What Are Financial Statements
By looking at financial statements, you will be able to know:
- The source of your money
- How you use your money
- How much funds you now possess on-hand that you can use
Financial statements give an outline of your accounting details in a reasonably understandable way (Also see 4 Warning Signs to on Your Financial Statements). They’re developed regularly according to your necessities. For most entrepreneurs who own a small business, they can do this once a month or once a quarter.
There are several types of financial statements you may utilise, and this depends on what kind of business you are running (Also see Tips on How to Sort Out Your Chaotic Finances). In this article, we will concentrate on two vital statements, which are the balance sheet and the profit and loss statement. We are not going to cover the third type of statement here, which is the cash flow statement. This will help you the most if your company uses of accrual basis of accounting, which is different from cash basis.
How to Read Financial Statements
The Balance Sheet
A balance sheet provides a short description which gives you a better understanding of your business as it now exists. It tells you the amount of money you own and can be used.
Utilising the Balance Sheet
By looking into the balance sheet, you will be able to
- Find your financial status so that you can trace it eventually
- Trace debts you have settled
- Handle a loan or money invested in your company
- Record your taxes by utilising the information on the balance sheets you have created throughout the financial year
Understanding the Balance Sheet
There are three parts in a balance sheet:
1. Assets. All the money you own. It is divided into two sections, which are Fixed and Current Assets. Fixed Assets are asset cost that are capitalised (Also see Facts About Expending and Capitalising Cost) such as office equipment and machinery. Current assets includes cash, accounts receivable and prepayments.
2. Liabilities. Money you are obligated to pay. Usually, that consists of credit payments, loans, or other debts. You can call this as Accounts Payable in bookkeeping.
3. Equity. Money that are invested in your business. This may comprise of retained earnings. In some firms, this is the shares you have or the investors’ money. It can be money you’ve obtained as a loan too.
The equation that can help you to understand the relationship between these three segments in the balance sheet is Assets = Equity – Liability.
The Profit and Loss Statement
Although the balance sheet informs you how much you are obligated to pay, as well as the amount of money you need to deal with, you won’t be able to know how you got there by looking at it.
You will be able to know these by using the profit and loss statement. It informs you about the amount of revenue you’ve generated and the amount of your spending throughout the year.
Utilising the Profit and Loss Statement
By looking into the information of the profit and loss statement, you will be able to
- Discover the impact of costs on your business, as well as cut down the expenses
- Show your business is long-lasting as this is crucial for you to safeguard an investment or a loan
- Trace how business choices affect the profitability of your business in the long run
- Acquire an overview on your deductible expenditures
Understanding Profit and Loss Statement
There are two parts in a profit and loss statement, which are Income (Billed) and Less Expenses.
Sales, which is the first section of this part, give you a brief statement of the amount of money you have issued invoices for.
Cost of goods sold (COGS), which is the second section, outlines the expense of developing your product. As an example, if you designed customised bags for a customer, you will classify the expense of the bags as COGS. Before you total your Income (Billed), you have to deduct this amount from your Sales.
All the non-COGS expenditures you have incurred when you run your business including advertisement, depreciation (Also see Straight-line Depreciation and Accelerated Depreciation) and administrative expenses.
If you face any difficulties in managing these documents of your business, it is advisable to hire an accounting firm in Johor Bahru to help you with these accounting tasks.