Understanding Financial Statements For Business Owners

Updated: May 20

#smallbusiness #Entrepreneur #Bookkeeping #CPA #Tax

What is Accounting?


It is a system of organizing financial data that is useful to individuals, businesses and other stakeholders.

  • Bookkeeping: the task of ensuring the transactions and financial information are entered into a system.

  • Financial Reporting: preparing the reports in an organized manner that is consistent with Generally Accepted Accounting Principles (GAAP).

  • Financial Planning and Analysis: creates forward looking financial statements and prepares analysis of the current and future state of the business.

  • Tax Accounting: Prepares financials in accordance to the internal revenue code and/or state tax codes to determine the amount of tax due to the government.

  • Audit: Enforces compliance with GAAP, IRC or other financial reporting method.


What are the 3 financial statements and their purpose?

  • Income Statement: How much did the organization sell, how much did it cost, and did it make a profit?

  • Balance Sheet: How much do we own, how much do we owe, and how much money did we put into the business?

  • Cash Flows: Where did i spend my cash, where did i receive my cash, and how much cash do we have?



Income Statement

  • Revenues: Sales earned, realized and realizable, but the cash may not have been received.

  • Cost of Goods Sold / Cost of Sales: Costs incurred in order to produce the goods or services that are sold.

  • Bad Debt Expense: Write off uncollectable sales from deadbeat customers.

  • Selling and General Administrative Expenses: Costs incurred that are not directly related to the production process, but necessary costs to support the selling, accounting and managing the people.

  • Depreciation and Amortization: Non-cash expenses which reflect the wear and tear of Plant, Property and Equipment as well as the use up of prepayments and intangible assets.

  • Interest Expense: Cost of debt financing of the business.

When looking at your Profit and Loss pay attention to how each cost item eats into your sales. What remains after all of your expenses are paid is called the Net Income.


Balance Sheet

Assets

  • Cash: Money on hand or in a bank.

  • Accounts Receivable: Money your customer owes you.

  • Inventory: Value of the goods that the business has ready to sell.

  • Plant, Property & Equipment: Buildings, Properties and Equipment you own.

Liabilities

  • Accounts Payable: Purchases made on credit or amounts owed to vendors.

  • Short Term Loans: Loans payable in less than a year. (square capital, kabbage, invoice financing, etc)

  • Long Term Loans: Loans payable in more than a year. (mortgages, business loans, car loans, etc)

Equity

Represents the amounts that the company technically "owes" to its owners.

  • Capital Contribution: Amount of money or transfer of the capital that the owner has put into the business which increases an owners' equity.

  • Owners Draws: Sometimes referred to as a distribution or a dividend. This represents a redistribution of capital back to the owners which reduces their equity in the business.

  • Retained Earnings: Profits retained by the business which has not been distributed to the owners.

The Golden Rule



ASSETS = LIABILITIES + EQUITY


The balance sheet is balanced by a simple formula - The total assets must equal the debt and equity raised to produce or purchase the assets.


Keep in mind that the Balance Sheet is only a snap shot of your current financial position at the period end date of the report. To see the movement of these accounts over the entire year, take a look at the Cash Flow Statement.




Cash Flows

  • Cash from Operations: Cash in and out flow from the day-to-day operations of the business.

  • Cash from Investing: Cash in and out flow from the Sale and/or Purchase of Plant, Property and Equipment.

  • Cash from Financing: Cash in and out flow from fundraising or repayment of bank loans and capital contributions from owners and shareholders.

We at GFT are dedicated to ensuring that our clients understand their financials and we are here to provide support to their decision needs - we are not just bookkeepers.


Please feel free to contact us for more detail.


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