Understanding Financial Statements: The Basics
As a small business owner or investor it is critical that you familiarize yourself with the concept of financial statements.
There’s so much more to financial statements than just the pieces of paper that make up the package. The true secret, and the power, of financial statements, lies in having the ability to understand what the numbers mean and how your business is trending, based on those numbers.
Here is a list of terms you are going to come upon over and over again in financial statements and all general accounting:
- Debit: An accounting entry that results in either an increase in assets or a decrease in liabilities or net worth. Opposite of credit.
- Credit. An entry in the financial books of a firm that increases a liability, owner’s equity (capital) or revenue, or an entry that decreases an asset or an expense. Opposite of debit.
- Assets. The properties used in the operation or investment activities of a business.
- Liabilities. Claims by creditors to the property (assets) of a business until they are paid.
- Equity. The owner’s rights to the property (assets) of the business; also called capital, member’s capital, partner’s capital, stock, additional paid-in capital, retained earnings or net worth.
- Income. For businesses, income can refer to a company’s remaining revenues after all expenses and taxes have been paid. In this case, it is also known as “earnings”.
- Expenses. Any expenses incurred in the ordinary course of business. Business expenses are deductible and are always netted against business income.
If interpreted correctly, the financial statement is the best tool a business has to find out what works and what doesn’t.
As a business owner, your time and attention should be focused on creating an investment model that makes money- and this is where the information provided on financial statements will serve its purpose.
Unfortunately, rather than interpreting the information on financial statements, many business owners dedicate their valuable time and resources on creating them. This is a waste of time and money.
Make sure your time is not used in tasks that do not translate into profit. Don’t spend hours creating tools that are already available and just an e-mail away. Learn how Cash Flow Accounting’s interactive accounting model will save you time and money. We offer a variety of different tools that will show you how you can make more money, cut costs and save on taxes. We will prepare accurate financial statements based on information you provide about your business, information your will be able to interpret by using our “Stats at a Glance” online program–all for less than you’re paying now. Please contact us at Info@CashFlowAccounting.com to get more information.
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