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Accounting and Bookkeeping

Income Statement (P&L Statement)

The main purpose of the income statement is to show you how profitable your business is.  It shows you your revenues and expenses for any given period and how much profit or loss you made.  You may have a “gut” feel for how your business is operating and by reviewing the income statement, you will be able to determine the following:

    1. Ensure that your revenues have not been understated
    2. Ensure that your expenses have not been overstated or determine whether there has been excessive expenditure.
    3. Understand the impact of changes to your product or service costs or changes to your selling prices or charge out rates.
    4. Tax liability based on your profit/loss.

 

Balance Sheet

A balance sheet is basically a summary of the financial position of your company represented by the following areas:

Assets – This represents your bank balances, receivables, inventory, fixed assets etc.
Liabilities – These are represented by payables, lines of credit, loans, bank
overdrafts, etc.
Equity   – This is basically represented by how much you have put into the business and taken out and an accumulation of your profit and losses.

The total of your Assets should always total the sum of your Liabilities and Equity (Assets = Liabilities + Equity)

By reviewing your balance sheet, you will be able to determine the following:

    1. The strength of your business in terms of its net asset base.
    2. How much cash is owed to you (receivables) and how much you owe (payables).

 

Cash Flow Statement

A question that you might find you often ask yourself is:  “Where did all the money go?”  The cash flow statement helps to gain a better understanding of where the profit you made was spent.  For example, it could have been used in any of the following areas:
  - Inventory was purchased for cash
  - Fixed asset items were purchased for cash
  - Outstanding payables were settled
  - Cash was lent to an employee
  - Cash was withdrawn by you

Bank Reconciliations

“I look at my bank balance on a daily basis so know how much money I have - why are bank reconciliations so important?”  We highly recommend that bank reconciliations be performed and/or reviewed on a regular basis by someone you trust. 

A bank reconciliation is basically a reconciliation of your bank account balance per the statement you get from the bank to the balance that you have in your accounting records.

Bank reconciliations help to identify the following:

    1. Outstanding checks that have not yet been presented for payment at the bank.   
      Let’s say your current bank balance is $10k.  However, you cut a check to one of your vendors for $2k about 60 days ago that got lost in the mail or misplaced.  Instead of having $10k available, you really only have $8k as the check could be found or a new one will need to be issued.

    2. Funds that have potentially been embezzled.
      This is particularly common in small businesses where you have one person that handles all your books and banking plus your business deals with cash.  Your bookkeeper person could be rolling cash or blatantly stealing from you and you don’t detect it because either a bank reconciliation is not being performed or that person performs it and it is not reviewed properly.

    3. Outstanding deposits
      Deposits may not have been posted correctly to your bank account or at all.  There could also be a delay between when a deposit should have been made and when it actually was reflected on your account.  This delay could be an indication that cash is being rolled – see no. 2 above.

    4. Excessive fees
      Banks make mistakes too!  Keep them in check by reviewing your bank’s fees on a monthly basis.

Bank reconciliations assist you in the following ways:
    1. They help to ensure that your records/bookkeeping is up to date and complete giving you a more accurate indication of how your business is doing.
    2. They help you to control your cash better.
    3. They assist in tracking and correcting employee errors. Regular bank reconciliations help in avoiding payment problems and delays due to insufficient balances.

 

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