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Accounting software needs to
provide you with your company's financial statements - the
balance sheet, the income statement and the cash flow
statement.
If the package you are using or reviewing does not provide
these three basic financial statements in sufficient detail for
your needs you may well consider looking elsewhere.
Investors and others outside the management group will need
the financial statements regularly if they are to invest in your
company. You yourself need to be fully aware of the data in
these statements in order to retain control of your business. We
will only give a concise overview of the financial statements
here.
The balance sheet
On a company's balance sheet it is shown which resources are
under that company's control on any specific date and where
these resources have come from. Keeping accurate record of your
information is therefore vitally important of these statements
are to be correct.
The balance sheet consists of three major sections and shows
the company's resources from different points of view. The list
of company assets must make clear where these resources
have come from. This is done in the list of liabilities as well
as in the owners' equity data.
The following basic equations must always be true in the list
of assets:
- total assets equals total liabilities plus total owners'
equity, or
- total assets minus total liabilities equals total owners'
equity.
Assets are the valuable rights owned by the company,
liabilities are the funds that have been or are provided by
outside lenders and creditors (against the company's promise of
repayment or provision of services in the future), and owner's
equity are the funds that have been or are provided by the
company's owners or by others on the owners' behalf.
Each of these three, assets, liabilities and equity is
further subdivided into various categories such as current and
noncurrent assets and liabilities, amounts receivable, accounts
payable as well as fixed assets such as land and buildings and
so forth. American and European equity differ so be aware of
this when you are dealing with these two entities.
The income statement
A company's success is measured by its control over its
assets (its goods and services). This success, or failure
thereof, is measured by the profits a company generates. This is
the net income to an accountant.
In a nutshell, income statements show how this profit or loss
is obtained in any given period by showing how much is made by
the sales of the assets and how this has cost the company, for
example, the cost of producing the goods as well as the taxes
that had to be paid.
Other information on the income statement can show the
effects of events that are outside of the regular activities of
the company. This could be anything from extra sales to extra
costs.
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The cash flow statement
Cash flow statements make clear how the management has made
use of the company's financial resources and is used to assess
the company's liquidity and its ability to cover the costs (pay
the bills).
Cash flow statements show the result of the operating
activities, the investing activities and the financing
activities of the company. Cash flow statements and income
statements can differ significantly depending on the activity so
don't mistake the two in their function, but we will not go into
the intricacies of the cash flow statement here.
Consolidated statements
If your company owns other companies you will need
consolidated statements. This would in fact be your primary
financial statement, showing the total assets, liabilities,
owners' equity, net income and cash flows of the parent company
and all others in the group.
Disclosure and audits
The obligation to issue financial statements are part of the
company's statutes and are mandatory in most countries. In the
United States the financial statements of most large and
medium-sized companies falls under the jurisdiction of the
federal Securities and Exchange Commission (SEC), which has a
great deal of authority concerning the content and structure of
these statements.
In Canada this authority is held by the provincial regulatory
bodies and the stock exchanges, in the United Kingdom it is
governed by the provisions of the Companies Act.
An audit is an outside review of the company's financial
statements which are usually prepared by the internal
accountant(s). These audits should be performed by qualified
professionals (usually not a family member or neighbour who is
willing "to help you out") who bear the title of Certified
Public Accountant (USA) or Chartered Accountant (UK), for
example.
These professionals will investigate the company's accounting
data and methods in detail and will allow the company to claim
that their statements are fair in showing the company's
position, results and cash flow, by referring to this
professional audit.
In conclusion, it is to your benefit and that of your
company, your employees and your customers, as well as the tax
department, that you have insight and control of your company,
that you know what it is doing, where it's been and where it's
going. A good accounting package can greatly help you in this.
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