It’s been said that the only thing that’s constant is change, and if you’ve been in business for any period of time, you know just how accurate this is. It is their positive reaction to modify, if there’s something that sets companies which have been successful over the extended haul-think IBM, General Electric, Wal-Mart or Microsoft, for example-apart from the other people.
Adapting to change impacts a firm’s ability to catch and hold onto its market, expand its business and profitably promote its products and services. However, every small business owner or manager needs to learn to differentiate between these business processes that must evolve and the ones that should remain stable.
When Change Is Destructive
While evolving in order to meet changing customer demands and an ever-shifting technological environment is vital, there are a few business processes where change and evolution are counter-productive, even destructive. Financial accounting is one of them.
The accounting scandals that brought down several large corporations in the early 2000s exemplified the damaging potential of getting too”creative” when it comes to financial accounting. While the government passed laws that attempted to tamp accounting irregularities, it is still mainly the responsibility of business owners and their accounting professionals to create and supply information that is precisely what I call ARTistic: Accurate, Relevant and Timely.
Accounting guidelines can and do change over time to reflect changing business models and new types of business transactions. Financial accounting for a business process needs to remain stable, evolving just after careful thought is given to the consequences of reporting trades otherwise. Ryan Kagan
A complete summary of the fundamentals of financial accounting is far beyond the scope of this article. However, by sharing a few standard accounting theories with you, I expect I will motivate you to take look at the financial statements a 38, your CPA slides throughout your desk.
The Chart of Accounts
Let’s begin at the start: with the financial data recording system that’s known as the chart of accounts. This is a systematic listing of all ledger account names and related numbers utilized by your company, arranged in the order in which they’ll look on your financial statements (more on these in a minute): usually Assets, Liabilities, Owner’s or Stockholder’s Equity, Revenue, and Expenses.
A chart of account permits the systematic reporting and also a summary of all of your company’s financial transactions. For example, you can go back and look at all of the vendor bills paid to determine what organization benefited from the expenses and just what work was done, why it was done.
Consider the chart of accounts as a selection of buckets, each having a specific kind of data inside. There might be a bucket for each debt you owe each asset your company owns, each item or service you market, and every kind of expense you incur to market services and products.
The chart of accounts is an organized, detailed collection of all of these buckets. The buckets, arranged by the type of data and subsequently, are labeled with the account number they hold. They can be rearranged throughout the accounting procedure as their contents are counted and assessed (normally monthly) so reports may be generated that outlines the information they contain.
The General Ledger
Nothis is not the person who secretly runs the accounting department and issues all those reports nobody can see! The general ledger is the place where all accounting transactions ultimately come to rest, and also the data source for your financial statements.
Think of the general ledger as a large, old-fashioned scale that’s always kept in equilibrium by adding and subtracting an equal and offsetting quantity of weight to each side. All are organized in one or another of those trays. You put into each bucket the information that reflects the impact of the transaction as transactions occur.
When something is added to a bucket on the Asset side, for example, something of equal worth either must be obtained from the Asset side (such as the cash paid to acquire the asset) or added to the Liability side (such as a loan taken out to pay for it). This way, the scale always remains in equilibrium and your company has a self-checking platform to ensure that the entire transaction was recorded properly.
The Financial Statements
These will be the actual”meat and potatoes” of small business accounting. There are three financial statement formats which look in reports and most business’ internal reports:
O Balance Sheet: This reveals the financial state of the company as of a particular date, normally the end of a month, quarter or year. It lists all of your obligations and all the resources of your company on one side on another. The difference between the carrying value of these assets and liabilities is equal to the equity interest.
O Income Record: Also commonly referred to as the Profit and Loss Statement, or the P&L, that recaps each the company activities that were meant to create a profit. It records the number of sales, all of the expenses incurred in making those sales (or the price of products sold), and the overhead costs incurred in running your business’s operations (e.g., wages, rent, utilities, etc.).
O Statement of Cash Flow: This reveals the effect of all of the transactions that involved or influenced cash but didn’t appear on the income statement. For example, if you borrow money and deposit it into your account for use afterward, expenses or no income are made, so this action can’t be reflected on the income statement. On the contrary, it would go to the statement of cash flow. Every transaction that occurs in your company involving any two balance sheet dates will be reflected in the income statement or the statement of cash flow, and from these two reports, the summarized results appear on your balance sheet in the kind of net changes to accounts.
Make Better Business Decisions
The secret to audio decision-making will be your capacity to comprehend and utilize those critically important business reports. They are the outcome and the result has to be relevant, precise, timely and known.
That is a function that can’t be assigned. Don’t shy away from requesting your accounting department until you really understand them or CPA to explain an element of those reports. The success of your business depends on it.