5 Types Of Documents Very Necessary For Financial Accounting In Business
When entrepreneurs start their businesses, most of their time and energy is spent doing many of the mundane business-related tasks.
They spend more time on day-to-day tasks such as customer service, sales and keeping inventory on demand. It is definitely important to handle these things efficiently. But what is very important and useful for long-term business growth and success is “having a thorough understanding of the organization’s finances.”
5 important types of financial documents are discussed here. Knowing how to create these documents or documents and having a good understanding of them is important for business people. Regular use of these documents is necessary to ensure business prosperity.
When these documents of an organization are viewed together, a holistic picture of the business of that organization is obtained.
1. Profit and Loss (P&L) Statement
The ‘Profit and Loss Statement’ or ‘Profit and Loss Statement’ (P&L) is also sometimes called the ‘Income Statement’.
Such statements are used to assess an organization’s current financial position and future growth potential. A P&L statement provides a summary of a business’s income and expenses over a period of time.
In the P&L statement, what is left over after deducting expenses is seen as profit. And if the expenditure is more than the income, then it is seen as loss.
It is normal for a small organization to face losses at various times. When a business starts up and grows over time, it’s normal to suffer losses. But persistent losses are a dangerous warning message for traders.
This means, more money is being spent than what is being earned. But if you know the financial aspects of the business well, you can spot these problems at the beginning. And can solve these problems more effectively.
2. Cash flow statement
82 percent of small businesses fail because of cash flow problems alone.
Business people often refer to this statistic to illustrate the importance of cash flow or ‘cash flow’ in business.
Regularly checking the ‘Cash Flow Statement’ or ‘Cash Flow Statement’ will keep your organization from being labeled as a failure very easily.
‘Profit and Loss Statement’ or ‘Profit and Loss (P&L) Statement’ simply shows the account of money coming in and money going out of the organization for a particular period of time. On the other hand, ‘Cash Flow Statement’ is more like a budget. ‘Cash flow statement’ is used to estimate the income and expenses in a certain period of time.
In many cases cash flows are used for the calculation of about 3 years. Some of the costs involved in running a business effectively, some are fixed and some costs vary depending on many factors. Apart from this, other expenses may include bank loan repayments, taxes and purchase of new assets if required. These expenses have to be paid with the income from the business. Whether an organization is able to carry out this process effectively is understood through the ‘Cash Flow Statement’.
3. Balance sheet
An equation of the assets of the business is obtained from the ‘Statutory’ or ‘Balance Sheet’.
In this equation, the owner’s equity or capital of the organization is added to the liabilities or liabilities of the business.
These may include short-term asset accounts. For example, this account may contain money or goods in a business checking account, which may be used quickly. And long-term assets may include real estate or major equipment used in business.
Similarly, the liabilities of the business are generally formed through short-term and long-term debt. Short-term loans may include current production costs and long-term loans may include borrowings taken by the business. And ‘equity’ includes cash invested by owners or investors.
4. Tax returns
While running a business it is important to keep a complete account of the taxes associated with the business.
Which tax form you file will depend on the type of business you run. And different types of business have to pay different types of taxes. Many businesses hire certified public accountants or other tax professionals to file their taxes.
However, it is important to review your own tax accounts even if you do the tax filing by others. With this, transactional staff in the organization can better strategize for business growth. It will also help in business management.
5. Accounts Receivable or Payable (also known as ‘Aging Report’)
Through the ‘Aging Report’, an account is kept of how much money the organization receives. How long this debt has been, the account is also kept through it.
‘Account receivable’ or ‘account receivable’ is a term used in accounting. Through this account is kept of the funds owed to the business. And ‘Accounts Payable’ or ‘Payable Accounts’ is another term that is used to keep track of what others owe to your organization.
It is generally believed in the business world that the older the debt, the less likely it is to be repaid. And if the money due to the organization is not received, that money goes to the loss account. As a result, there may be problems in ‘cash flow’.
The ‘Aging Report’ clearly shows how long, how many accounts receivables are still unpaid. With the help of this, necessary measures and steps can be taken to control the financial situation of the business.