Simple Accounting For Businesses
Let’s look at three financial records every business owner should prepare and review regularly: the profit-and-loss statement, the balance sheet, and the cash-flow statement. These three are some of the core values to consider when thinking about simple accounting for businesses.
Profit and Loss Statement (P&L): This record shows how much you have earned in revenues; how much you have spent; and what your net income is over a specific period of time. The time period could be for a week, month, quarter or year, although it is generally for a month. In fact, the P&L tells you whether or not you are making or losing money. Furthermore, if structured and maintained properly, the P&L can tell you what products or services are generating income and where you are spending too much on expenses such as advertising.
Balance Sheet: Balance sheet or statement of financial condition shows you what your assets and liabilities are. In other words, you see how much you own and how much you owe and the net worth of your business. Assets could be cash, equipment, building and money owed to you. Liabilities are what you owe to others including accounts payable, taxes, loans and payroll. Net worth is the difference between what you own and what you owe.
Cash-Flow Statement: This record is a lot like a personal ledger which shows you how much money is coming in and how much money is going out over a specific period of time. This record is very important because although your P&L might show you are selling products or services, your customers might be slow to pay you. Or you might prudently be spending in anticipation of growth and P&L incorrectly suggests you are losing money. You need to look at your P&L and cash-flow statement to get a true picture of the health of your business and make prudent business decisions.
Business is like a human body. It needs care and attention. You could be a financial physician of your business by diligently developing and maintaining a few financial records.