One of the axioms of business is that the only thing that stays the same is change, and this is certainly true. Companies like IBM, General Electric, Wal-Mart, and Microsoft, which have endured for decades while others have failed, are distinguished by their ability to adapt positively to change.
It’s important for a business to be flexible in order to remain competitive, expand its market share, and make a profit from the goods and services it sells. Small company owners and managers, on the other hand, must be able to tell the difference between procedures that need to change and those that can stay static.
When a Shift Is Harmful
There are certain processes in business when change and evolution are not just counterproductive, but potentially harmful. While developing to satisfy changing customer needs and a constantly altering technology environment are important, A good example of this kind of accounting would be financial accounting.
Financial accounting “creativity” has the capacity to do great harm, as the early 2000s accounting scandals that drove many major companies to their knees showed. It’s still the duty of company owners and their accountants to produce and deliver accurate, relevant, and timely financial information, even if legislation has been enacted by the government in an effort to curtail these types of accounting errors.
To reflect evolving company models and new kinds of business transactions, accounting standards may and do evolve over time. Financial accounting, on the other hand, should be a reliable business process that changes only after thorough consideration of the consequences of reporting transactions differently.
This article does not cover all of the fundamentals of financial accounting. In any case, I hope that by introducing you to a few basic accounting principles, I may persuade you to take a closer look at the financial accounts your CPA presents to you next month.
Accounts Payable and Receivable
Let’s start with the basics: the chart of accounts, which is a financial data keeping method. For your company’s financial statements, here is a list of all ledger account names and related numbers, organised alphabetically by the following headings: Assets, Liabilities, Owner’s Equity, Revenue and Expenses.
In order to record and summarise all of your company’s financial activities, you need a chart of accounts. Take a look at all vendor bills paid over a period of time to see what work was done, why it was done, and who benefitted from the spending.
Consider the chart of accounts as a series of buckets, each containing a certain kind of data. Each asset, each loan, each product or service you sell, and each kind of cost you spend to sell goods and services can be put in a separate bucket.
All of these buckets are included in an account chart of accounts. According to the kind of data each bucket contains, the buckets are named and organised accordingly. Their contents are tallied and reviewed (typically weekly) so that reports that summarise the data they contain can be generated, and this allows them to reorganise them throughout the accounting process.
The Ledger General
No, this isn’t the guy who secretly oversees the accounting department and generates all of those documents that only a select few have access to. The general ledger is where all of your accounting transactions will end up, and it’s where your financial statements will get their information from.
This huge, old-fashioned scale is balanced by adding and removing an equal and offsetting amount of weight from either side. This is how the general ledger works. In one of the trays, all of the buckets that show in the account breakdown are organised. Data that reflects the financial impact of each transaction is added to each bucket as it occurs.
Adding anything to an Item bucket necessitates either subtracting from the Asset side (such as the cash spent to purchase the asset) or adding to the Liability side something else of comparable worth (such as a loan taken out to pay for it). To make sure everything is recorded correctly, have a self-checking mechanism in place that ensures the scales are constantly in balance.
The Statements of Financial Position
Here’s where small company accounting gets down to “meat and potatoes.” Annual reports, as well as most company internal monthly financial reports, use one of three basic financial statement formats:
An organization’s balance sheet reveals the company’s financial health as of a certain date, such as the end of a month, quarter, or year. One side displays your company’s assets, while the other side shows its liabilities. A company’s equity stake is equal to the difference between its carrying value and its liabilities.
This is also known as the Profit and Loss Statement (P&L) and summarises all business operations designed to generate a profit for the firm. It shows how much money your firm makes, how much it costs to make those sales (or how much it costs to sell the products), and how much it costs to operate the business (e.g., salaries, rent, utilities, etc.).
In this statement, any transactions that involved or affected cash but did not appear on the income statement are shown. Statement of Cash Flow No revenue or expenditures have been generated, therefore the activity cannot appear on the income statement if you borrow money and deposit it in your checking account to be used later. Instead, it would appear on the cash flow statement. In your business, every transaction will be represented in the income statement or the cash flow statement between two dates on your balance sheet, and the summary results from these two reports show in your balance sheet as net changes to balances.
Improve Your Business Decision-making Process
The capacity to comprehend and utilise these crucial business reports will be essential to good decision-making. They represent the sum of all of your company’s financial transactions, and as a consequence, the information they include must be accurate, timely, relevant, and easy to understand.
This is a non-delegable position. If you don’t understand anything in these reports, don’t be afraid to contact your accounting department or CPA to clarify it. It’s critical to your company’s success.
