Don’t Reinvent the Wheel When Accounting for Your Business’ Future

It’s been said that is change, and if you’ve been in business for any period of time, you know how accurate this is. If there’s something that sets businesses that have been successful over the long IBM, General Electric, Wal-Mart or Microsoft from the other people, it’s their positive reaction to modify.

Adapting to change impacts a company’s ability to capture and hold onto its economy, expand its business and profitably promote its products and services. However, every business owner or manager must learn how to distinguish between these business processes that must evolve and the ones that should stay stable.

When Change Is Destructive

Whilst evolving so as to meet changing consumer demands and also an ever-shifting technological environment is vital, there are some business processes where change and evolution are counter-productive, even destructive. Financial accounting is one of them.

The accounting scandals that brought down several big corporations in the early 2000s exemplified the destructive potential of getting too”creative” when it comes to financial accounting. While the government passed legislation that attempted to tamp down accounting irregularities, it’s still the responsibility of business owners and their own accounting professionals to create and supply financial 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 as a business process needs to remain secure, evolving after careful thought is given to the potential implications of reporting trades.

A complete summary of the fundamentals of financial accounting is far beyond the scope of this report. By sharing a few standard accounting theories with you, I hope I will motivate you to possibly take look at the statements a 38, your CPA slides throughout your desk.

The Chart of Accounts

Let us begin at the start: with the fiscal information recording system that’s known as the chart of account. This really is a systematic list of all ledger account names and associated numbers used by your company, arranged in the order in which they’ll appear in your financial statements (more on them in a minute): usually Assets, Liabilities, Owner’s or Stockholder’s Equity, Revenue, and Expenses.

A chart of accounts permits the systematic reporting and also outline of all of your company’s financial transactions. You can go back and examine all vendor bills paid during a particular time frame to ascertain just what work was done, why it was done and what company benefited from the expenditures.

Think of the chart of account as a selection of buckets, each having a specific sort of information inside. There might be a bucket for every asset your company owns, every debt you owe, each item or service you market, and each type 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, in turn, are labeled with the proper account number and arranged from the type of information they hold. They may be rearranged during the accounting procedure as their contents are counted and checked (normally monthly) so reports can be generated that summarizes the information they contain.

The General Ledger

Nothis isn’t the person who secretly runs the accounting department and issues those reports nobody could read! The general ledger is the location where all accounting transactions finally come to rest and the data source for your financial statements.

Consider the general ledger as a large, conservative scale that is always kept in balance by adding and subtracting an equal and offsetting amount of weight to each side. The buckets that appear in the chart of accounts All are all organized in one or another of those trays. You put into each bucket the information that reflects the financial impact of that transaction as transactions occur.

When something is added to a bucket on the Asset side, as an instance, something of equal value either must be taken from the Asset side (such as the money paid to acquire the asset) or added to the Liability side (for instance, a loan is taken out to cover it). In this manner, the scale always remains in balance and your organization has a self-checking system to make sure that the entire transaction was recorded correctly.

The Financial Statements

These will be the actual”meat and potatoes” of small business accounting. There are three financial statement formats that look in annual reports and Many business’ monthly financial reports that are internal:

  • Balance Sheet: This reveals the financial state of the company as of a particular date, usually the end of a month, quarter or year. It lists all the assets of your company on one side and all your liabilities on the other. The difference between the value of liabilities and the assets is equal to the equity interest.
  • Income Record: Also commonly known as the Profit and Loss Statement, or the P&L, that recaps all of the company activities that were meant to produce a profit. It lists the number of sales, all of the costs incurred in making those sales (or the cost of goods sold), and the overhead costs incurred in running your business’s operations (e.g., salaries, rent, utilities, etc.).
  • Statement of Cash Flow: This shows the impact of all of the trades that involved or influenced cash but did not appear on the income statement. By way of instance, if you deposit it in your account to be used later and borrow money, no expenses or income have been made, so this activity can’t be reflected on the income statement. It goes to the statement of cash flow. Every transaction that occurs in your business involving both balance sheet dates will be reflected in either the income statement or the statement of cash flow, and by those two reports, the summarized results appear on your balance sheet in the form of net changes to balances.

Make Better Business Decisions

The key to sound decision-making will be your capacity to understand and use those critically important business reports. They’re the condensed outcome of every transaction that the company has undertaken, and the result has to be understood, relevant, timely and accurate.

That is a function that cannot be assigned. Don’t shy away from requesting your accounting department until you understand them, or CPA to explain any aspect of these reports. The success of your business depends on it.