Important financial documents for a small business
As a small business owner, you need to prepare these documents to ascertain the economic status of your company. In addition, it becomes proof to show your company’s financial condition and to make wiser divisions for the future.
Trail balance construction.
A trial balance has to balance; if not, an error may be made in the original postings of the figures to the ledgers. In that situation, the bookkeeper has to go back, check all data, and rectify the mistake. When the trial balance work is finished, the senior staff will determine the profit and loss. The senior team uses the trial balance to prepare the trading profit and loss account. The profit and loss account reviews the expenses, purchases, and income during a particular accounting period. These figures only show whether you have made a profit or loss during a specific period. It is essential that you have to get this report right, as the calculation of tax liability is based on this report. I will show you a small sample of the profit and loss report.
Profit & Loss
Unlike a Balance Sheet, the Profit and Loss Statement of income and expenditure is a snapshot’ of economic resources. It is a summary of the flows of earned revenues and incurred expenses of a business for a period. That is why when you see one, it says something like Profit & Loss Statement for the year 200X. It shows the company’s financial progress for a stated period and is used by investors, lenders, and tax computations.
What is a Balance sheet?
A balance sheet is a statement that is massively important to the business. It comprises assets, liabilities, and retained earnings, known as capital and reserves. The balance left over when the assets are less shows the company’s financial position. The year-end process includes preparing the trial balance, profit and loss account, and balance sheet. These are done at the end of a particular financial year for a business to do tax calculations. Then the work for the next fiscal year starts with the bookkeeping procedures. The profit and loss and balance sheet statements are used to prepare the budget and cash flow forecasts. Now, I will show you a sample copy of the balance sheet.
Cash flow statement
The Statement of Cash Flows summarizes the ‘cash’ effects of the activities of a business for a period. These activities can be operating, investing, and financing. The keyword I would like to emphasize in the above definition is ‘cash.’ It only records activities that involve the transfer of cash. When your sales are reasonable, you might have trouble with money in hand to meet the operational expenses. The reason behind that may be lots of goods or services sold on credit. If you have checked the creditworthiness of your customers, there is no problem in getting cash to improve your cash flow.