You went into business to do whatever it is that you love to do. Unfortunately, somewhere along the line, you learned a hard lesson … running a business requires a lot more tasks than what you originally signed up for. One of the most challenging aspects – a responsibility that strikes fear in the hearts of anyone without an accounting degree – is keeping track of your financials.
Financial statements are not only necessary when you seek credit or a loan, or when you have a board or investors you have to answer to. They are also important for you to understand where your business is and what you need to do to make it better. Thankfully, running financial reports on your company doesn’t have to be a frightening experience. With the right know-how and the right expert support with your bookkeeping, you’ll become a “numbers person” in no time.
Need help with accounting & bookkeeping?
Contact Larry L. Bertsch, CPA & Associates, LLP today!
What Are The Different Types of Financial Statements?
If you were planning a trip, there would be two essential pieces of information you’d have to have. First, where are you going? Second (and possibly even more importantly), where are you now?
If you don’t know where you are, you won’t have the ability to plan your route to reach your desired destination. Consider financial statements the “where are you now” of the business world. These documents clearly show the financial state of your business and include five specific documents (which we’ll discuss in more detail in a moment). The five types of financial statements are:
- Income Statement
- Cash Flow Statement
- Statement of Change in Equity
- Balance Sheet
- Note to Financial Statements
Each of these documents is necessary to get a full view of your company and your financial reality. Let’s take a closer look at each statement, what it includes, and what it tells you about your company’s health.
Sometimes called a Profit and Loss Statement or a Statement of Financial Performance, your income statement will incorporate all of the revenue, losses, and expenses a business has incurred to determine whether the company has turned a profit or is operating at a loss. This can be presented in two different formats: a single statement that incorporates both income statements and other comprehensive statements or a multi-statement where these statements are presented separately.
Cash Flow Statement
If you needed money, how quickly could you access it? A cash flow statement shows you how much working capital you have at any given time. This can differ depending on how quickly customers pay their invoices and will help you understand your ability to pay your bills on time.
Statement of Change in Equity
How is ownership held in your organization? The Statement of Change in Equity will show any changes made to share capital, retained earnings, and accumulated reserves. If you are a solopreneur, it shows any changes to your equity. If you have a partner, it will show any changes in both owners’ equity. Finally, if you have shareholders, any changes for any shareholders will be listed.
This document is sometimes called a Statement of Financial Position and will include your asset statement, your liabilities, and your equity at a specific point in time. It shows the current value of a business and lets you know if you will be able to pay all of your bills for that given period.
Note to Financial Statements
Required by the International Financial Reporting Standards (IFRS), this document provides explanations of the information in other financial statements.
Preparing Financial Statements
Now that you have a basic understanding of what financial statements you’ll need for your business, let’s take a closer look at how to prepare them. Before you get started with specific statements, you’ll want to make sure that your books are in order and up to date. To do that you must:
- Verify you received all supplier invoices
- Verify you’ve issued all customer invoices
- Accrue wages that have been earned but not yet paid
- Calculate the depreciation and amortization expense for all fixed assets
- Figure out the cost of goods sold by getting an ending inventory balance
- Reconcile your bank statement with your own records
- Post subsidiary ledger balances to the general ledger
With that done, you can begin to prepare your financial statements, beginning with your Income statement. Select a reporting period and then take your income (or loss) and subtract your expenses to determine your net income (or loss).
Next, you’ll create a cash flow statement. Start with an opening balance and then calculate all the cash coming in (actual money, not money promised through a contract). Some potential sources may be:
- Current sales
- Personal money you’ve deposited to fund the business
- Collection of previous sales made on credit
- Loans taken during the period
Once you’ve got this total, you’ll be subtracting the cash going out. This could look like:
- Rent or a mortgage
- Loan payments
Finally, subtract your cash going out from your cash balance. This will leave you with how much cash you have leftover at the end of the month and will serve as your opening balance for the next period. If this number is negative, you do not have enough money to pay your bills.
Balance sheets should be produced quarterly or monthly, as they communicate the book value of a company to shareholders, investors, and lenders. In order to create your balance sheet, you will need to use the following equation:
Assets = Liabilities + Owner’s Equity
Assets include anything a company owns which holds any quantifiable value (it could be turned into cash if need be). These include current assets which could be converted into cash within a year’s time and non-current assets (i.e. long-term investments).
Liabilities include anything a company owes to a debtor such as rent and utility payments, payroll expenses, money owed to suppliers, or any debt payments. Much like assets, liabilities are classified as current liabilities which will be due within one year, and non-current liabilities which the company doesn’t expect to pay within one year.
Shareholder’s Equity is the net worth of a company and tells you how much money would be leftover once all assets were sold and liabilities were paid. This equity is then divided up by the number of shareholders.
Assuming the income statement and the balance sheet have been prepared properly, your Statement of change in equity will be correct.
Finally, creating your Notes to the financial statements will include items such as accounting policies, inventory valuation, depreciation of assets, etc.
Once you’ve created these financial statements, review the numbers for any errors and make necessary corrections. You can then accrue an income tax expense, close any subsidiary ledgers for that period and open them for the next period.
Need Help Creating Financial Statements For Your Business?
Understanding your financial statements is essential to running your business. However, there is support available. If you’d prefer to enlist the help of trusted bookkeeping services in Las Vegas, contact Larry L. Bertsch, CPA & Associates for a free consultation. Leave the bookkeeping to us so you can get back to doing what you love.