Why fininacial statement for business owners. For businesses to improve and survive in a competitive environment, they have to understand and acknowledge the importance of financial statements. ” To improve you need to measure”
Some essential financial statements to be understood are the Balance sheet, profit, loss, and trial balance; these are very crucial when reporting for small businesses and ensuring their competitiveness in the market.
When operating a business with no knowledge or understanding of this financial report is similar to walking while blindfolded you will have no sense of direction, looking into these financial reports in detail will help in understanding them.
All businesses that are immersed in this financial activity need daily reports in various areas such as market price, market demand, cost of production, competitive activity, investments, statutory levies, and price.
All these included the most crucial is the financial aspect such as capital, salaries, revenues, cost, investments, and loans.
To make sure that all data and information are correctly stored there will be a need for the accountants to use a means well known as the Trial Balance, this will allow the accountant to formulate information that will later be utilized for providing crucial financial statements like the profit and loss statement also known as the income statement and the balance sheet.
The above-named statements are known to be the most crucial financial statements for several people that have shown interest in any given organization or company.
For example, one can be a supplier that wants to supply goods and services, another one might want to give out a loan to the company or organization and might want to find out if the company or organization will have the ability to pay back, on the other hand, there might be another who is an investor and would want to invest in the company.
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The financial statements will help give an overview of the company or organization in any of these given instances.
What is trial balance
In any accounting procedure established on the dual entry method all and any expenses obtained will be placed as a debit in one account and a credit in another account.
Furthermore, all money received will attract the same treatment.
When the period is over and all entries are made, what is left is for a trial balance to be prepared; this will then be the overview of all the general ledger accounts.
At the end of a given time(one year) which the trial balance was generated for all the accounts will either show the credit balance or the debit balance all depending on the number of transactions recorded In each account.
When the balances are finally listed out there will be an Indication if the total number of credits and debits tally, in a situation whereby they don’t tally there will be a need to investigate which will reveal the error, and at the same time help correct it. This trial balance also helps in tracing any mathematical problem or wrong entries.
When all errors have been corrected to make sure the debit and credit account tally this trial balance will then be used to formulate crucial financial statements, specifically it will be used to prepare the profit and loss sheet and the balance sheet.
This trial balance is considered an interior document and is solely meant for only interior auditors and company personnel.
What is balance sheet
A balance sheet gives the day-to-day financial state of affairs of a company or organization particularly relating to all the liabilities, assets, and capital belonging to the company or organization like the instance whereby a photograph captures the moment a balance sheet captures the day-to-day activities.
A balance sheet has numerous parts they are;
- capital
A company that manufactures goods will need to purchase instruments that help in the production of goods, it would also need money to pay for labor, the funds needed to buy and pay for all these needed will have to come from the owner’s pocket.
This is then referred to as capital.
- Secured And Unsecured Loans
When a company or organization lacks sufficient capital it will have to take loans from agencies or find investors willing to invest.
These loans can be in the form of secured and unsecured loans.
When loans like bank loans or debentures are given against the asset of a company this is then known as secured loans and in a situation whereby advances or loans are given without the security of the company’s assets, these are known as unsecured loans.
- Liabilities
Naturally, the liability aspect of the balance sheet comprises items like reserves and surplus, secured and unsecured loans, current liabilities, and provisions, and also share capitals.
- Assets
The side of the balance sheet that includes the asset contains items such as fixed assets, current assets, investments, debit balance of the profit and loss account, and miscellaneous expenses.
Profit and loss statements
A company is run with a distinct purpose to earn profits, it is fundamental that the operations of the company for about a year should be summarized into a statement called income statement(profit and loss statement)
Below is how to prepare an income statement.
- Profit or loss
Profits are made only if revenue surpasses expenditures or expenses.
If the expenditure or expenses surpasses revenue that is when losses are made.
Hence the profit and loss statements list the accomplishments of the company in that year which will tell if the company is financially robust or not.
Here is an equation to explain the profit and loss statement;
Profit=revenue-costs
- Gross profits
Gross profits can be procured by deducting regulating expenditure from regulating revenue.
- Operating income
The operating income is gotten from deducting aloft from gross profit.
- Revenues
Revenues are commonly sales revenue gotten from goods sold or services provided.
Financial statements are fundamental in helping the management of a company to understand it better, normally managers should prepare these three financial statements monthly to make retributive regulations if that is needed.
This will also help in approaching investors by showing the investors the performance of the company.
This will affect the decision-making positively making the investors arrive at a decision swiftly.