Bookkeeping basics for your business - Article 3

By Bharath Reddy

This is the last article in the series of article's about bookkeeping.

Creating Financial Statements:

Financial Statements:

1. Enable you to asses the short term working capital.
2. Set Targets
3. Analysis of improving the profit margins
4. Efficient Organization of sales and expenses
5. Better tax planning
6. Planning for employ benefits
7. Manage proactively
8. Helps in borrowing money from financial institutions
9. Financial planning for investors &
10. Making the business more profitable.

Important financial statements that will be detailed in this article are

1. Income Statements:
2. Balance Statement
3. Cash-Flow Statement

Income Statement:
Income Statement measures the revenue sources against business expenses over a period of time. Major components in the income statement are

1. Sales- This is the gross revenue generated from a sale. This is the main component generating from the income for your business.
2. Cost of goods sold- This is the direct cost associated in generating the sales. These costs include all kinds of resources which include direct labor, manager salaries and other operating costs.
3. Gross Profit- It represents the amount of direct profit associated with the company.
4. Operating expenses- These are the general selling expenses, those are necessary to run the business.
5. Operating Profit- This is the amount of profit earned during the normal course of operations. It is computed by subtracting the operating expenses from gross profit.
6. Other income and Expenses- This represents those return that do not occur during the normal operation of business.
7. Net Profit before taxes- This is the amount earned by business before paying taxes.
8. Income Taxes- Total amount of state and federal taxes paid.
9. Net profit after taxes- This is the amount of earnings for your business computed by subtracting taxes paid from net income before taxes.

Balance Sheet:

Balance Sheet provides snap shot of business assets, liabilities and owners equity for a given time.

1. Assets- These are the assets that can be converted to cash in a year or less. They include cash, stocks, other investments account receivable and prepaid expenses.
2. Fixed Assets- These are the tangible assets of a business that will not be converted to cash within a year. These include land, buildings, machinery and vehicles.
3. Intangible assets- These are the assets which can not be touched or seen. These include franchise rights, good will, agreements and other items.
4.  Other Assets- These include cash value of insurance investment properties and all other dues.
5. Liabilities- These are the obligations for your business that are due. These include notes payable on lines of credit and other short term loans, current maturities of long term debt, accounts payable, expenses and taxes, payroll that is due to employees and amounts due to stock holders.
6. Long term liabilities- These are the obligations of the business that are not due for at least one year. These consist of bank debt or any loans payable outside the twelve month period.
7. Owner’s equity- This is the total amount invested by stock holders plus accumulated profit of the business.

Cash-Flow Statement-

In the earlier sessions you have seen the difference between accrual and cash flow basis of accounting. The accrual basis of business is generally preferred for the income statement and balance sheet because it more accurately matches the revenue sources to the expenses however it is important to analyze the actual cash flowing in and out of the business.

Cash-Flow statement is divided into 4 categories-

1. Net cash from operating activities- Operating activities are daily internal activities of the business. These either require cash or generate the cash. These include cash collection from customers, cash paid to sub layers and employees, cash paid from operating expenses interest and taxes.
2. Net cash flow from investment activities- Investment activities are discretionary investments made by the management. These primarily consist of the purchase or sale of any equipment etc.
3. Net cash flow from financing activities- Financing activities are those external sources which include sales of common stock changes to short term and long term loans and dividends.
4. Net change in cash and marketable securities- The results of first three calculations are used to determine the total change in cash and marketable securities caused by fluctuations in operating, investing and financing cash flow

(c) Copyright 2007. All rights reserved.

S.V Bharath Reddy , is one of the founders of The Cashflow Crunchers, a web site for Investors and Smallbusiness to share investing tips and other information. For more articles, tips, and free online calculators, please visit http://www.cashflowcrunchers.com

Who Are The Cashflow Crunchers?

The Cashflow Crunchers are a small group of investors who enjoy finding a great deal as much as working on unique software applications.  If you have an idea for a tool that you feel would be useful to other investors, send us an email.  We'd love to hear from you!

Please note that we will not sell or distribute your email address or any other personal information to anyone else, PERIOD. This web site takes every precaution to protect our users' information and all of our users' information is restricted in our office. We hate spam as much as you do and we will do everything to protect your privacy, just as we would want our privacy protected.