The preparation of financial statements is made possible by the existence of accurate and thorough accounting records.
Most of the small business firms prepare an income statement, balance sheet, statement of cost of goods manufactured, statement of changes in the financial position, and the like.
And this is commonly known as typical financial statements.
Typical financial statements
Income Statement: The income statement shows the results of a firm’s operations over a period of time, usually one year.
Balance Sheet: The balance sheet is a statement that shows a firm’s financial position at a specific date.
Figure showing that Both Sides of the Balance Sheet are Balanced
Statement of Cost of Goods Manufactured: The statement of cost of goods manufactured is a supporting, detailed schedule of the “cost of goods manufactured” entry in the income statement.
Statement of Changes in Financial Position: Formerly known as the “statement of sources and uses of funds,” the statement of changes in financial position shows how a firm acquired funds and employed these funds over the same period covered by its income statement.
Entrepreneurs’ Most Vital Financial Statements
The most popular financial statements and the purposes for which these are used may be seen:
Figure showing the Accounting System in a Small Business
In spite of the obvious importance of keeping accounting records, many small firms do not maintain them adequately. A file of canceled checks and invoices alone is woefully inadequate.
It has been discovered, for example, that small firms, which have gone bankrupt typically, had inadequate accounting records.
On the other hand, small firms: which maintain adequate records reflect high-quality management because such records provide management a basis for more effective decision making and better control over operating results.
Furthermore, adequate accounting records make it easier to detect employee frauds, waste, spoilage, and other losses.
Install a basic set of accounting books in a combination journal-ledger system. Such a system is explained in the letter part of this chapter. This is the heart of the accounting records.
The basic record, plus a worksheet summarize operations at the end of ilea month or fiscal period will enable the owner to make formal balance sheets and income statements regularly.
Anyone who has had a high school course in bookkeeping should be able to handle both. sassily. Self-instructing computer programs may be of help too.
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