It has been said that the only thing that’s constant is change, and if you’ve been in business for any period of time, you know just how true this is. It is their reaction to modify if there’s something that sets businesses which have been successful over the long IBM, General Electric, Wal-Mart or Microsoft from the other people.
Adapting to change affects a company’s ability to catch and hold onto its market, expand its business and profitably sell its products and services. But every small business owner or manager needs to learn how to distinguish between those business processes that have to evolve.
When Change Is Destructive
While evolving in order to meet changing customer demands and an ever-shifting technological environment is vital, there are some business processes where growth and change are counter-productive, even destructive. Financial accounting is one of them.
The accounting scandals that brought down several large corporations in the early 2000s exemplified the damaging potential of getting too”creative” when it comes to fiscal accounting. While the government passed laws that attempted to tamp such accounting irregularities, it’s still primarily the responsibility of business owners and their accounting professionals to make and supply information that is what I call ARTistic: Accurate, Relevant and Timely.
Accounting guidelines can and do change over time to reflect changing business models and new kinds of business transactions. Financial accounting for a business process needs to remain stable, evolving only after careful consideration is given to the implications of reporting trades otherwise.
A whole overview of the basics of financial accounting is far beyond the scope of this article. By sharing standard accounting theories with you, I hope I will motivate you to perhaps take look at the statements next 38, that your CPA slides across your desk.
The Chart of Accounts
Let us start at the beginning: with the fiscal information recording system that’s known as the chart of accounts. This really is a systematic list of all ledger accounts names and related numbers utilized by your company, arranged in the sequence in which they will look on your financial statements (more on these in a moment ): usually Assets, Liabilities, Owner’s or Stockholder’s Equity, Revenue, and Expenses. RYAN KAGAN CPA – Home
A chart of accounts allows systematic reporting and also a summary of all your company’s financial transactions. By way of example, you can go back and examine all vendor bills paid to ascertain what organization benefited from the expenses and just what work was done, why it was done.
Think of this chart of account as a collection of buckets, each having a particular sort of information inside. There could be a bucket for each asset your company owns, every debt you owe, each item or service you market.
The chart of accounts is an organized, comprehensive collection of all these buckets. The buckets, in turn, are labeled with the proper account number and arranged by the type of data they hold. They can be rearranged throughout the accounting process as their contents are counted and assessed (normally monthly) so reports may be produced that summarizes the data they contain.
The General Ledger
No, this isn’t the individual who secretly runs the accounting department and issues all those reports nobody could see! The general ledger is the place where all accounting transactions ultimately come to rest, and the information source for your financial statements.
Consider the general ledger as a large, conservative scale that is always kept in equilibrium by adding and subtracting an equal and offsetting amount of weight to each side. The buckets that appear in the chart of accounts All are all organized at one or the other of the trays. As transactions occur, the data that represents the financial impact of that trade is added to each bucket by you.
When something is inserted to a bucket on the Asset side, as an instance, something else of equal worth either must be obtained away from the Asset side (such as the money paid to acquire the asset) or added to the Liability side (such as a loan taken out to cover it). The scale consistently remains in balance and your company has a self-checking platform to ensure that the whole transaction was recorded.
The Financial Statements
These are the real”meat and potatoes” of small business accounting. There are three financial statement formats that look in reports and Many business’ annual financial reports that are internal:
O Balance Sheet: This shows the financial state of the company as of a specific date, normally the end of a month, quarter or year. It lists all of your company’s assets and all of your liabilities on another. The gap between the value of the assets and liabilities is equal to the equity interest accruing to the owners.
O Income Statement: Also commonly referred to as the Profit and Loss Statement, or the P&L, this recaps each the company activities that were intended to create a profit. It records the number of sales, all the costs incurred in making those earnings (or the price of goods sold), and the overhead costs incurred in running your company’s operations (e.g., salaries, rent, utilities, etc.).
O Record of Cash Flow: This reveals the effect of all of the trades that affected or involved cash but did not appear on the income statement. By way of example, if you deposit it into your account to be used later and borrow money, expenses or no income are created, so this action can’t be reflected on the earnings statement. It would go to the statement of cash flow. Every transaction that happens in your business involving both balance sheet dates will be reflected in either the income statement or the statement of cash flow, and also by these two reports, the summarized results show up in your balance sheet in the form of internet changes to balances.
Make Better Business Decisions
The key to sound decision-making will be your capacity to understand and use those critically important business reports. They’re the result of each transaction your organization has undertaken, and the outcome has to be precise, relevant, timely and understood.
That is a role that can’t be delegated. Do not shy away from requesting your accounting department or CPA to describe any aspect of these reports until you understand them. The success of your business is dependent upon it.