 |
Simple Definitions Of The 3 Basic Financial Accounting Statements
By Stephen Windhaus
Entrepreneurship begins with the excitement of setting up your own business and selling the products and services you enjoy. You either develop your knowledge and skills for the product or service while working for someone else, or it is something you always liked and want to make your life's work. The wise entrepreneur begins the process by developing a business plan to map the route to take in setting up and operating the business. Others just go out and set up shop, buying what they need to operate and begin selling.
Regardless of the route taken, you eventually run into the matter of having to account for the profits, losses, receipts and disbursements that come with the need to control your budget. You will either contract a bookkeeper or accountant to keep your books, or struggle through the process of learning the process on your own. But no matter what route is taken, you eventually find yourself staring at those documents called balance sheets, income statements and cash flow statements.
Whether you contract a professional or learn the procedures with accounting software, every entrepreneur should understand those three financial statements, interpret them, and learn their usefulness in analyzing the financial condition of their business.
Let's begin with the balance sheet. Think of it as a document that shows the financial condition of your business at the point in time the statement is prepared. In simple, ideal conditions it represents what you have (assets), what you owe (liabilities) and what is left (net worth) if you liquidate all assets into cash and pay off all your liabilities. In the real world a financial analyst does not put full faith in the dollar value of your assets. For example, if you have inventory and are forced to go out of business, that inventory is probably sold off for less than your original cost. The value of your liabilities is probably more realistic in that you are expected to pay off the full amount of those debts. Therefore, the net worth is less than what is shown on paper.
Now let us consider the income statement. This statement shows how you have used your assets to generate sales. And the use of your assets is reflected in the form of expenses. In simple terms, you total your sales, subtract expenses and you are left with profit before taxes. This is the statement of greatest interest to the IRS.
|
|
