Focus: To understand the two main financial reports you'll need to prepare to keep your accounts in order.
What You'll Learn In this lesson we go in-depth so you will learn essential financial terms you need to know to understand where your business stands in the profit and loss game and how you can improve.
Why is This Important? Simple. If your business is not making any profit, you are not able to re-invest so your business in the best case stalls or is heading towards suffering from loss. Growth requires profit so you need to know how to manage your finances to become profitable.
The two main financial reports prepared by all types of businesses are the:
Statement of Financial Performance (Profit & Loss Statement)
Statement of Financial Position (Balance Sheet)
The format of these reports will vary from business to business and the reporting requirement required by the business owner(s) or the law. However, all financial reports revolve around five types of business classifications. These classifications are:
Assets are items of value owned by the business and things that attract money into the business. Assets are usually purchased to assist in producing revenue such as property, equipment, investments, buildings, or result from trading such as debtors (accounts receivable), stock (inventory) and cash in the bank or petty cash. You should remember that if the business is acquiring an item of value that will add value to the business or money is owed to it, then the item should be classified as an asset.
These are amounts of money owed by the business to others. Examples include creditors, accounts payable, bank overdraft, GST payable, mortgage and loans payable to the business.
This is the owners’ investment in the business. The accounts that make up this classification are capital (when the owner puts money or assets into the business) and drawings (when money or assets are taken from the business by the owner).
Revenues are items of income earned by the business as a result of engaging in activities designed to derive a profit. Examples include sales (of services), interest received (on investments), commissions received, discounts received and dividends received (on investments).
Expenses can be defined as the costs of operating the business on a daily basis. Examples include: rent, rates, stationery, advertising, motor vehicle expenses, purchase expenses and freight on goods. The list of expenses can be extensive. You should remember that if money is being spent on an item that is not adding value to the business as in the case with an asset, or was not a liability (owing), it would most likely be an expense.
Go to page 3 of your Money Lane Workbook and list examples of assets, liabilities, owner equity, revenues and expenses.