The purpose of any business financial recordkeeping system is to provide a clear vision of the relative health of the business, both on a day-to-day basis and periodically. We have seen a lot of small businesses fail. Often times, the reason is due to business owners not able to control the finances. They failed to understand the complex accounting processes and systems that has become a standard in modern business. Business owners themselves need to know whether they are making a profit, why they are making a profit, which parts of the business are profitable and which are not. This information is only available if the business owner has a clear and straightforward recordkeeping system. Business owners also need to be able to produce accurate financial statements for income tax purposes, for loan proposals, and for the purpose of selling the business. Clear, understandable, and accurate business records are vital to the success of any small business. In order to design a good record keeping system for a particular business, an understanding of certain fundamental ideas of accounting is necessary.
Accounting is the design of the recordkeeping system that a business uses and the preparation and interpretation of reports based on the information that is gathered and put into system. Bookkeeping is the actual input of the financial information into the recordkeeping system.
The purpose of any business recordkeeping system is to allow the business owner to easily understand and use the information gathered. Certain accounting principles and terms have been adopted as standard over the years to make it easier to understand a wide range of business transactions. In order to understand what a recordkeeping system is trying to accomplish, it is necessary to define some of the standard ways of looking at a business. There are two standard reports which are the main sources of business financial information : the balance and the profit and loss statement.
The Balance Sheet
The purpose of the balance sheet is to look at what the business owns and owes on a specific date. By seeing what a business owns and owes, anyone looking at a balance sheet can tell the relative financial position of the business at that point in time. If the business owns more than it owes, it is in good shape financially. Oth the other hand, if it owes more than it owns, the business may be in trouble. The balance sheet is the universal financial document used to view this aspect of a business. It provides the information by laying out the value of the assets and the liabilities of a business. One of the most critical financial tasks that a small business owner must confront is keeping track of what the business owns and owes. Before the business buys or sells anything or makes a profit or loss, the business must have some assets.
The Profit and Loss Statement
The other main business report is called the profit and loss statement. This report is a summary of the income and expenses of the business during a certain period. Profit and loss statements are generally prepared monthly, quarterly, or annually, depending on the type of business. Profit and loss statements are sometimes referred to as income statements or as operating statements. Generally, income for a business is any money that it has received or will receive during a certain period. Expenses are any money that the business has paid or will pay out during a certain period. Simply put, if it has more income than expenses during a certain period, it has made a profit. If it has more expenses than income, then the business has a loss for that period of time.
The purpose of a business financial recordkeeping system is to provide a method for the owner to keep track of the ongoing health of the business. This is done primarily by providing the owner with information on two basic financial statements. The balance sheet provides the business owner with a quick look at the assets and debts of the business and at the equity or ownership value of the business. The profit and loss statement furnishes the owner with an immediate view of the current flow of income and expenses of the business.