If you would like to run a successful business, you have to understand the basics of finance. You need to understand where your money is coming from, how you are spending your money, and how much is left over. Because there are a lot of moving parts you need to track, it might be helpful to use the best accounting software for small business. Small business accounting software can provide you with a wide variety of tools you can use to keep up with these key numbers. Because there are so many accounting programs available, you need to identify the best bookkeeping software to meet your needs. If you use bookkeeper software to generate a financial statement, what are a few areas you need to track carefully?
What Is a Financial Statement?
A financial statement, which is also known as a balance sheet, is important for tracking your assets and liabilities. There are numerous ways a balance sheet can be structured. In some cases, this could be a cash flow statement. In other cases, this could be an income statement. Regardless, a balance sheet is one of the most important statement of the financial position of a company. Whether you are a potential investor, a business owner, or an executive, you need to understand how a financial statement is laid out. That way, you can read it appropriately, and come to the correct conclusions regarding the future of the company.
How Does a Balance Sheet Work?
In general, a balance sheet is divided into two large parts. Ultimately, the two parts have to be equal to each other. Otherwise, there is something missing.
The assets of the company have to be equal to the liabilities plus the equity held by the shareholders. The company’s assets have to be balanced by the financial obligations of the business. When this is combined with the equity investment and its retained earnings, the equation has to be equal on both sides. Otherwise, you need to find where the missing money is located.
Assets are what the company uses to keep up with its daily operations. In contrast, liabilities and equity are used to support those assets. Owner equity, or shareholder’s equity if the company is traded publicly, is equal to the amount of money invested in the company plus the earnings it has brought in. This is the main source of funding for the business.
A financial statement can also be used as a snapshot of the financial position of the business at a given point in time. It is important to track these balance sheets over time to identify trends that could be taking place in the business.
What Are the Most Important Areas of a Financial Statement?
If you want to read a balance sheet correctly, you need to understand the most important areas of the financial statement. A few important areas include:
Current Assets
This is the most common type of asset retained by the company. Current assets typically have a lifespan of less than a year. This means they can be converted quickly into cash if the company needs it. Examples of current assets include accounts receivable, inventory, and catch. There are also cash equivalents, such as US treasuries, that can be used to find the company operations.
Inventory represents any raw materials, equipment, or finished goods the company may have on hand. Depending on the industry in which you operate, your inventory can vary significantly. As an example, a manufacturing company probably has a significant amount of raw materials that it uses to fulfill its orders. In contrast, a retail outlet probably does not have a lot of inventory.
Accounts receivable is another example of current assets. This represents the money owed to the company by prior customers and clients. It is not unusual for businesses to sell something to customers using some form of credit. Then, the obligations are listed in current assets until the client settles the balance.
Non-Current Assets
Non-current assets refer to anything the company has that cannot be turned into cash quickly. This could include the building, land, goodwill, patents, and copyrighted materials. In a lot of cases, these assets are not physical. They are often resources that the company uses over an extended amount of time. For example, if the company has a powerful brand name, this is one of the most important non-current assets. It is important to value non-current assets because they can be what is holding the company afloat.
Depending on the nature of the balance sheet, depreciation may be involved in the calculation of non-current assets. This is particularly important if the company has heavy equipment that it uses on a regular basis, but will have to be replaced at some point in time.
Liabilities
It is also important for a business owner to keep up with liabilities. This is on the other side of the equation. This is money that the company owes to other people. For example, the company may have a supplier that needs to be paid for the raw material. This represents immediate liabilities that are going to come due in the future. This could also include accounts payable.
There could also be long-term liabilities, which represent what the company owes to someone or an organization. For example, the company may have taken out a loan to purchase property. This represents a long-term liability.
Equity
Equity is another important part of this equation. It represents the amount of initial money that was invested into the business. If there is leftover money at the end of the year, the company may decide to take these net earnings and invest them back into the business. At that point, the retained earnings would be transferred from the income area of the balance to the equity area. This account can also be used as a quick valuation of the net worth of the business. Remember that the total assets need to equal the equity plus the liabilities of the business.
Income
Finally, there might also be a section on the balance sheet for income. This represents the money that is coming into the company over a certain amount of time. Some balance sheets list income for the month while other balance sheets might list income throughout the year. It is also possible that a business may decide to project its income to some point in the future.
Ultimately, a financial statement can be structured differently depending on its purpose. It is important for everyone to be familiar with the separate areas of the balance sheet so they can interpret them easily. That way, it is possible to make a decision regarding what to do next.
Find the Best Accounting Software To Track Your Finances
If you want to generate financial statements quickly, then you may want to use accounting software to help you. An accounting program can automate a lot of these tasks, allowing employees to spend more time analyzing the balance sheet and last time making it. An accounting program can also reduce the number of mistakes that are made in producing a balance sheet. That way, leaders can make decisions based on accurate information.
