Bookkeeping Basics: Financial Statements for Small Business

One of the most crucial aspects for businesses of any scale is ensuring the business has reliable and accurate bookkeeping.  Financial statements are the core of tracking financial data and provide snapshots of critical aspects of fiscal information. If your human resources personnel are looking through candidate new hires, your best way to find a bookkeeper is to seek a qualified individual who understands how nested components of financial statements relate across those documents to create a faceted  representation of the state of your business.

Bookkeeping Statements by Type

There are three basic statements even a small business must maintain and transaction data must be entered into the accounts in these statements. The three basic types of financial statements are, 1) Profit and Loss Statement, 2) Balance Sheet, and 3) The Chart of Accounts.

The three statement types mentioned are designed reflect four things: assets, liabilities, owner equity, expenses, revenue. Best bookkeeping practices demand consistency and accuracy in managing these statements, as well as general good fiscal sense to see a composite of internal business conditions.

Profit and Loss Expanded

As far as financial statements go, the first financial statement is the Profit & Loss Sheet. According to some bookkeeping models, this may also be referred to as the Income Statement. It is a snapshot of the cash flow of a business, that is: the money coming in from the sale of goods or services rendered compared against money spent for goods and services allowing the business to operate.

Into the Balance Sheet

The Balance is Sheet representative of a company as a going concern. On it we see the current assets and liabilities. Current assets are those which the business expects to convert to cash within a year, that is: property that will directly contribute to, and thereby be converted into, liquid funds.

Property is considered under current assets if they will be converted within 12 months of the date of the Profit and Loss Statement. Current liabilities are fiscal commitments the company anticipates honoring within the same 12-month period. Bookkeeping should adhere to Generally Accepted Accounting Principles, or GAAP, in determining the conditions under which entries into the Balance Sheet are arrived-at.

The COA, Charting the Accountancy

Lastly, there is the Charter of Accounts. It can be considered something of a file tree into which all information particular to the accounts of a company are placed. It is ordered by type of account, with one or many accounts of a type filed within. This is the most complex financial statements.  When hiring needs require you find a bookkeeper, this sheet alone can be a test of their mettle. The types of account within the Chart of Accounts number five: assets, liabilities, equity, expenses, revenues.

Recapitulation

So, to re-examine the basics of the financial statements, the first is the Profit and Loss Statement, or P&L, which tracks present cash flow and immediate business performance within its scope. The Balance Sheet is a picture of the total fiscal health, or value, in a company or firm. It addresses assets, liabilities, and equity, generally within a 12-month span.

Chart of Accounts is an organizing structure used to file fiscal data by category and by the following types: assets, liabilities, owner equity, expenses, and revenues. These are the most basic forms for organizing the financial information of a company and understanding of them is an essential set intellectual tools every firm must have.

Anthony Azevedo, CPA is an accounting and the managing member of EZCFO a bookkeeping company specializing in human resource, payroll, and employer solutions.

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