Tweet

Accounting Basics

Guest post by: Mash Bonigala

Article Overview: In part one of this article I detailed what accounting is and why it is important to your small business. In part two, I will go into greater detail on the three parts of a financial statement: the balance sheet, income statement, and cash flow statement.

Accounting Basics

In part one of this article I detailed what accounting is and why it is important to your small business. In part two, I will go into greater detail on the three parts of a financial statement: the balance sheet, income statement, and cash flow statement.

Balance Sheet

The balance sheet is a quick snapshot of your business at a specific moment in time. Balance sheets include two pieces, the stuff you have and who owns it. The two pieces must add up to the same cash value. The “stuff you have” can include several different items. In general, the two main categories are labeled as:

• Current Assets- this is either cash or items that can be converted to cash within a year. If you sell a product those products will be included in this category
• Fixed Assets- this includes property and equipment owned by the business

The other side of the balance sheet gives more details to who owns the assets. This can be you or your business partners, or other companies or banks. All of your assets are owned by someone, so both sides of the equation will always be equal. If you find they are not equal then you know you have made a mistake.

Income Statement

As opposed to the balance sheet, the income statement shows the businesses profitability over time. This statement is also known as a profit and loss statement, because it details all of the income earned and all of the expenses incurred. After you subtract all of expenses from your income you have found your “net profit.” The easiest way of compiling an income statement is to take you total income and subtract the cost of sales (labor costs, materials, shipping, etc.). Your income will not only include cash received but also, when applicable, money owed to the business. At this point you have your gross margin. Then you take the gross margin and subtract your fixed operating costs (rent, utilities, insurance, etc.). You have now found you net profit, otherwise known as, your bottom line.

You may also need to include investment costs and depreciation of equipment that will eventually need to be replaced. If you include these items all at once it can appear that you had a very bad period, instead include them over time to show the true status of your business.

Cash Flow Statement

The name tells the story to this financial document. It simply describes how cash flows in and out of your business on a daily basis. The ending cash balance during a financial period is then used to describe the cash on hand in your balance sheet. In a simple format the cash flow statement will have four parts: beginning cash balance + cash coming into the business – cash leaving = ending cash balance. The ending cash balance is then carried over to the next cash flow statement as the new beginning cash balance. Because the cash flow statement reflects actual cash on hand, even when your income statement shows a negative profit, the cash flow statement can never go below zero. Some business will use other formats for their cash flow statements.

It’s not as scary as it seems

Don’t get bogged down in the term accounting. It is not really as complicated as some CPAs might have you believe. There are only three basic pieces to a financial statement:

1. Balance Sheet: your snapshot
2. Income Statement: you bottom line
3. Cash Flow Statement: how the money moves

Next Steps

The easiest way of creating your own financial statements is to use financial software or to use a template produced by the SBA or other organization. Don’t be afraid to ask for advice. The two best sources for free and reliable advice are your bank and a local SBA office.

Related Articles
  How Do You Read Profit And Loss
  3 Key Reasons A Business Needs To Keep Books
  Top Three Bookkeeping Basics
  Disaster from Day One or Successful Accounting Software Implementation
  Double-Entry Accounting: A Place to Start
  Accounting 101
  Entrepreneurs Need Accounting Education
  Outsourcing Accounting: Easy Accounting Outsourcing to India for Small Businesses in USA
  Introduction to Accounting
  Why Accounting Outsourcing
  Bookkeeping Work From Home
  ACCOUNTING PRINCIPLES & STANDARDS: AVOID THEM AT YOUR PERIL
  Focus on your strengths
  Future of Hotel Call Accounting
  Millionaire Internet Marketing Basics! ~SUCCESS SECRETS EXPOSED
  Why an Integrated Financial Accounts?
  Outsource Accounting
  How to Decide on Outsourcing Accounting Services
  3 Common Tax Mistakes
  Report presentations to provide clarification of your financial position

Article Tags: accounting basics, balance sheet income statement, cash flow statement, financial statement, small business



Related Forum Posts
Seek Venture Capital & Funding - Hello, Greetings from India. I am Seeking Venture Capital for Offshore Software Company Start-up. Need advise along with Business Model Sample. I have a basic outline for an offshore company. 1. Technology - like Microsoft Dot Net, Java, LAMP 2. Talent Team - Found Good Technology Developers. 3. Where I can get the leads/potential customers - Leads have been identified who are willing to move forward offshore projects. 4. I do not have resources like funding. It is a very critical factor to me Industries: Manufacturing, Real Estate, Retail, Insurance, Distribution & Logistics, Healthcare, Industry Associations and Software Product Development, Agricultural Industries and Etc. Services: Offshore Software Development Company. Offices to be located: Hyderabad, Andhra Pradesh, India and USA. Products/Services/Applications in areas like POS & Billing, Sales & Distribution, Production Planning, Material Management, Inventory Control, Plant Maintenance, Purchasing, Accounting and Logistics. Dynamic Web Programming with Database Driven Content Management Systems, Online Stores for E-Commerce, B2B Solutions, Community Portals, Website Redesign and Development, Custom ERP with Enterprise Wide Functional Modules such as Marketing, CRM, Accounting, Inventory Control, Sales & Distribution, Production Planning, Purchase & Stores, Logistics and Supply Chain. Seek your further questions and help. Thank you, Best Regards, Jayapratap.
Wearing different hats in Business - I have a business that produces beautiful custom rugs for home and business environments. Different hats that I'm wearing... Rug Fabrication - 10 [i:21cr28m8](partially outsourced to an outfit here in the US)[/i:21cr28m8] Customer Service / Sales - 8-10 Bookkeeping - 1 Marketing - 6 Website development - 5 [i:21cr28m8](mainly outsourced)[/i:21cr28m8] SEO, SEM - 6-8 Accounting - [i:21cr28m8](outsourced)[/i:21cr28m8]
Kevin's Case Study #5 - Different "hats" you wear - To help all entrepreneurs (especially aspiring new ones), I'd like to ask: 1.) What is your small business? 2.) Then list the numerous "hats" you're required to wear in order to succeed. Moreover, go on to rate each job function on a scale of "1 = generalist" to "10 = expert" and even which tasks you outsource. Perhaps this post will act as a decisive factor on whether a person should pursue a specific business idea or not. [i:exdr7mc8]For example, if I owned my own bakery, I'd create my list as follows: 1.) Professional Baker 2.) Different hats I'm required to wear: -Dessert making (8-10) -Customer service/Sales (7) - Job function is outsourced -Accounting (5) - Job function is outsourced -Marketing (4) - Job function is outsourced -etc...[/i:exdr7mc8]
Book: Secrets of Six Figure Women - Secrets of Six Figure Women: Surprising Strategies to up your earning and change your life Barbara Stanny, 2002 Jacket: Maybe you've noticed - a subtle trend is gathering steam. Quietly and steadily, the number of women making six figures or more is increasing, and it continues to rise at a rate faster than for men. From entrepreneurs to corporate executives, from white collar executives to free lancers and part timers, women are forging careers with considerable financial success. Through extensive research and hundreds of interviews, including dialogs with more than 150 high earners whose annual incomes range from $100,000 to 7 million, Stanny discovered that ...they all had certain traits in common: 1) a profit motive 2) Audacity 3) REslience 4) Encouragement 5) Self-awareness 6) Non-attachment 7) Financial knowhow She amplifies on these in the book itself. Table of Contents Intro: Welcome to the era of the six-figure woman 1. The Queen in the Countinghouse 2. The Lowdown on low earners 3. Raising the bar 4. Strategy 1: The Declaration of Intention 5. Strategy 2: Letting go of the ledge 6. Strategy 3: Get in the Game 7. Strategy 4: Speak Up 8. Strategy 5: The Stretch 9. Strategy 6: Seek Support 10. Strategy 7: Obey the rules of money 11. Claiming our power Appendces: Resources and websites Tips for getting out of dent Investing Basics: Wealthbuilding 101
the BDC - Hi Renee, the BDC is a great lender to many Canadian businesses. I've heard many horror stories from businesses that have had problems with the BDC, but I think it all depends on which account manager you deal with (that's the case with most lenders). Anyways, I have a great relationship with the BDC Toronto office, and was successful earlier this year in getting two service based companies loans under the BDC Innovation financing program ($100,000 and $150,000, both for marketing and growth initiatives). Here's an article I wrote about the BDC late last year for an Accounting Firm's newsletter: The Business Development Bank of Canada is a financial institution belonging to the Government of Canada, with the mandate: “to encourage innovation and stimulate the growth of small and medium-size Canadian companies.” The BDC usually looks for companies with a sound management team that possess solid growth potential. The BDC can provide working capital solutions to complement traditional bank financing. The BDC’s lending practices are somewhat different from the traditional chartered banks. With the BDC, borrowers receive a guaranteed term, meaning that financing cannot be recalled without due cause. As opposed to the chartered banks, where facilities are typically demand loans and can be recalled at any time. The BDC has very flexible repayment terms, including deferring principal payments, amortizing loans for up to an 8 year term, or offering seasonal and/or progressive payment options. This allows businesses to structure their cash flow accordingly. The BDC is willing to lend to companies that are more leveraged than traditional banks would consider. As well the BDC is willing to finance higher loan-to-value ratios than the chartered banks max out on. The BDC also offers subordinated debt, where they will postpone their claim to a chartered bank. Sub-debt can be very advantageous to many companies, because the BDC ties the repayment terms to the company’s cash flow projections. The pricing model can be setup as normal interest payments, royalties on sales, bonus interest based on milestones, warrants or some combination of these items. The BDC lends sub-debt to businesses based on historical cash flow, management and growth potential. The innovation financing program provides small businesses with funds to carry out marketing and/or growth plans, increase inventory, and/or develop new products. The BDC funds all types of businesses including start-ups, however will not fund any business that earns 50% or more of their profits from alcohol sales or gambling. The cost of borrowing from the BDC is generally higher than the chartered banks. The BDC’s base rate generally starts at two points above regular bank prime, and then the risk premium is applied to these rates based on each project's potential and the amount of risk involved. The BDC may not be ideal for all businesses, but as an alternative and/or complement to traditional bank financing, the BDC could be a very attractive solution.


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Promoting your company and self with verve

Selling with Humor (and a Sorry Butt)

The Strong Leadership Formula

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.