| The core functions of accounting are bookkeeping | | | | not necessarily mean the business could be sold |
| and financial reporting to managers and investors. | | | | for this amount. Much more needs to be |
| However, the accounting department of a | | | | addressed when determining the selling price of a |
| business is usually also responsible for payroll, cash | | | | business. Nevertheless, the balance sheet is an |
| inflows, cash payments, purchases and inventory, | | | | important report that indicates how much you |
| and property accounting. If these functions are | | | | have and how much you owe at a certain point in |
| not done efficiently and on time the business will | | | | time. |
| not survive. | | | | The Income Statement |
| Many of these functions, and much of accounting, | | | | The Income Statement, or profit and loss |
| focus on business transactions. These are | | | | statement, measures income and expenses. It |
| economic exchanges between the business and | | | | summarizes the profit-making activities of the |
| persons or other businesses that the business | | | | business over a period of time. One section of |
| deals. Accounting means understanding how these | | | | the report lists all income: earned, passive or |
| transactions are accounted for. Most businesses | | | | portfolio. The other section of the report lists all |
| carry on economic exchanges with six basic | | | | expenses. It often looks like this: |
| groups: | | | | Basic Income Statement |
| 1) customers, who buy products and services, | | | | Income |
| 2) employees, who are paid wages and salaries | | | | - Expenses |
| and are provided benefits for working for the | | | | = Net Income |
| business, | | | | Preparing income statements on a regular basis |
| 3) suppliers and vendors, who sell to the business, | | | | assist in measuring financial progress. Most |
| 4) debt sources of capital, who loan money to | | | | managers and investors pay more attention to |
| the business, | | | | the income statements and you will often see |
| 5) equity sources of capital, who invest in the | | | | abbreviated versions in the financial pages |
| business expecting a profit on the capital invested, | | | | reporting the top line of sales revenue and the |
| and | | | | bottom line of net income. |
| 6) the government, who collects various taxes. | | | | The Cash Flow Statement |
| There are also other events that have economic | | | | Cash flow refers to the stream of cash coming in |
| impact on the business that must be recorded, | | | | as income and going out as expenses. The cash |
| such as lawsuits, uninsured flood or other loss, | | | | flow statement summarizes the sources and uses |
| severance pay to laid-off employees, and other | | | | of cash in the business during a financial period. A |
| non-planned circumstances and events. | | | | successful business must manage both profit and |
| The first core function of accounting is too keep | | | | cash flow, they do not equal each other. Cash |
| track of and record all the above economic | | | | flow statements often look like this: |
| exchanges, while the second is to report it. | | | | Basic Cash Flow Statement |
| Accountants prepare financial statements for | | | | Part 1. Operating Activities. Cash flow from the |
| businesses to report to managers and investors. | | | | profit making transactions of the business |
| The three most basic financial statements are the | | | | Part 2. Investing Activities. Cash inflow and |
| statement of financial condition or balance sheet, | | | | outflow from investing activities. |
| the income statement and the cash flow | | | | Part 3. Financing Activities. Cash inflow and outflow |
| statement. Everyone in business should | | | | from the financing activities. |
| understand and know how to read these three | | | | Summing the three types of cash flows from |
| statements. | | | | above determines the bottom-line net increase or |
| The Balance Sheet | | | | decrease in cash during the period. Net cash flow |
| The balance sheet, or statement of financial | | | | from part one, operating activities, will not always |
| condition, summarizes the assets owned by a | | | | match the profit reported in the income |
| business on one side and the sources of its | | | | statement. This is because actual cash flow and |
| assets on the other. Sources of assets are | | | | expenses from sales are on a different time table |
| divided into two basic categories: liabilities and | | | | that when sales revenue and expenses are |
| owners' equity. Some assets come from | | | | recorded on the books. Profit performance of a |
| borrowing money or buying on credit that has not | | | | business gets the most attention, but it is also |
| been paid yet. These are liabilities. The remaining | | | | important to understand and know the cash flow |
| assets come from owners' equity which consists | | | | from profit and that is found in this important |
| of the money invested in the business by the | | | | statement. |
| owners and the profit the business has earned | | | | You do not need an MBA, nor do you need to be |
| and retained. It is important to remember that | | | | a CPA, to run a business. However, understanding |
| the balance sheet is like a snapshot and only | | | | basic accounting will assist you with the financial |
| shows how much the business is worth on the | | | | aspects of your business, investments, taxes, and |
| day the balance sheet is drawn up. | | | | financial management. You will be at a |
| You generally see balance sheets like this: | | | | disadvantage if you do not understand accounting |
| Basic Balance Sheet | | | | basics. If the accounting functions and three basic |
| List of Assets List of Liabilities | | | | accounting statements covered in this section are |
| Owners Equity | | | | new to you, it is imperative you seek out |
| Total Assets = Total Liabilities + Owners' Equity | | | | resources to learn more on this subject. If you |
| Sometimes you will also see owners' equity | | | | already have a basic understanding of accounting |
| referred to as net worth. This is computed as | | | | principles and statements, make sure you are |
| Assets - Liabilities = Net Worth. While this may | | | | keeping on top of them in both your business and |
| imply that the business is worth the amount | | | | personal life. |
| recorded in the owners' equity accounts, it does | | | | |