Financial Accounting – Reporting to individuals outside the business identifies the three most critical financial statements that are significant to aspiring entrepreneurs as follows:
1. The Financial Statements or the Balance Sheet
2. The Income Statement or Profit and Loss Statement
3. The Cash Flow Statement.
The Balance Sheet summarizes a business’s assets, liabilities, and equity. It is a’snapshot’ of the economic resources available to companies at a certain point in time. That is why, when you see one, it will read something like The Financial Statements as of dd/mm/yyyy.
In contrast to the Balance Sheet, which provides a snapshot of economic resources, the Profit and Loss Statement summarizes a business’s generated revenues and incurred expenses over a specified time period. That is why, when you see one, it will read something along the lines of Profit and Loss Statement for the year 200X.
The Statement of Cash Flows describes the ‘cash’ consequences of a business’s operations over a specific time period. These operations can be operational, investment-related, or financing-related. I’d want to stress the term ‘cash’ in the preceding definition. It solely keeps track of transactions involving the transfer of cash.
I can summarize the preceding even more briefly as follows:
1. Your balance sheet details the assets you own and how they were acquired (borrowed from others or contributed by you).
2. Your Profit And Loss Statement shows you how much money you spend and how much money you gain each period.
3. The Cash Flow Statement highlights cash exchange in your operating, investing, and financing activities.
When most freelancers start a small business, they should focus on their profit and loss statement because it is a record of their revenue and expenses. Consider the revenue items to determine which activities generate income and the expenditure items to decide which activities cost the most and whether those expenses are genuinely essential. Are there any areas where you could save money?
Costs are the first thing that any entrepreneur must control when starting a firm. There should be no expense item that goes unreported or unmonitored. Their very existence requires justification. Each dollar is critical. Each dollar spent on one thing is a dollar that could be spent on something else.
Please keep in mind that this article is intended to be a guideline only. You should still obtain expert guidance on this subject, as regulations and practices change over time and vary by nation.
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