Establishing a business can be one of the most challenging tasks that you will ever encounter. For one, it involves a lot of risks. You would need to invest all of your time, patience, and financial power into this single entity. Starting all of it would mean it would be similar to putting all of your bets in at once. If you fail, all would be lost, and you would need to start from scratch. Sometimes, you would even need to scratch lower. If you succeed, then the next task would be to continue your ascent and create more income.
However, one of the aspects of any business that you need to establish right after is accounting. They will be the ones who are going to oversee where the finances are going, and if the company is gaining profit. This process might seem too easy and uninteresting, but there are various tasks and responsibilities that this particular area holds.
If you do not have anyone tracking the finances, it would be easy for many people (in and out of your business) to manipulate your income. From corporate fraud to actual stealing, the accounting department protects you from most of it.
It is a well-known fact that it is the responsibility of accountants to record the three types of paperwork for any business: balance sheet, cash flow statement, and profit and loss account. It is not easy to say that one is better or more important than the other. Each of these is important because of the information that they give to the company. A balance sheet, for example, tracks everything that the company owns by the end of a specific period. Cash flow statements determine the buying power of a particular business like you can still invest in more assets.
Profit and loss accounts are also known as income statements. They are the ones that deal with the total income of the company. This account includes everything that the business does, from selling their products and services to even liquidation.
As long as the company is earning and moving money, there is an income statement for that. It is somewhat different from both balance sheets and cash flow because of its immediacy. When you are viewing the income statement, you will see if the company is generating any profit or otherwise. The data that results from these accounts will decide whether the company is still stable but only in certain conditions, as this might only show one accounting cycle.
Profits Minus Loss Equals Income
Profit and loss statements will also show which parts of the operation are underperforming. It will show every part of the business that is supposed to generate income, from the materials to the equipment. Of course, there might be other factors in play, but this is an excellent place to start.
The first thing that you would encounter in this statement is the revenue. After that, the costs of operation will be subtracted from it. These expenditures include the costs of goods, manning equipment, repairs and the like. The outcome would be known as the net income, and this is the determinant of your success in generating profit.
On the other hand, you need to remember that these are just numbers. All of these financial statements are going to show what is happening inside of your business. It makes it easier to track, especially if you are already a large company. Many factors can still affect the operations even though they are out of the papers.
For example, if there is mistrust or unrest amongst the employees, then this can reflect on their ability to work. Also, workplace conditions and health concerns can affect your output negatively. If you are at the top of the management, make sure that you even know what is happening on the production floors.
If you are going to work for accounting, there was a time when you always need to start from scratch. For example, the income statement would still be processed last, and you need to do this manually. Fortunately, the internet provides us with numerous templates that are easy to use and understand. Always remember, though, that the other two financial statements would be used as a guide for profit and loss.