A set of reports comprised of the Balance Sheet, Income Statement, Cash Flows Statement and the Statement of Retained Earnings. Each report has a function in reporting the financial status of the company. Financial statements taken separately do not convey the total picture of the operation. To understand a company’s financial performance, read the financial statements as a whole.
Just as manufacturing uses controls to ensure quality of product, controls are used in accounting to generate accurate information, maintain security over assets and comply with Generally Accepted Accounting Standards. The company implements various controls to assure accurate and timely information.
The accounting profession uses various tools to generate accurate accounting information at the close of accounting cycles (monthly, quarterly and annually). The primary document is the working trial balance. It is very similar to the traitional trial balance except there are additional columns used to identify various adjustments and the corresponding source documents (work papers).
The bookkeeping cycle is like a huge giant clock with several dozen gears from a multiple cog gear rotating the most frequently turning cog cascading into the one large gear that once turned changes the timer one year forward. The bookkeeper’s job is to make all the gears click and keep the system lubricated. At the end of the year, hopefully the final gear moves one click on time and the process starts all over.
Class accounting breaks down sales and the associated cost of sales into functional groups. Whether you use divisions or departments or product/service lines class accounting allows you to identify those more profitable areas of operations. This is just one of the many different financial reports used in small business.
The financial reports illustrate changes in the businesses’ financial condition over time. Just as man has evolved, a business grows over time. Naturally most small businesses want to be highly successful and the reports are issued to evaluate change.
Financial statements serve the purpose of presenting economic activity and status related to a particular date and over a particular time frame. Accountants record monetary transactions and via financial reports present the information in an easy to understand format. The financial statements for a small business do not have to comply with those of publically traded operations.
A well organized and understandable restaurant profit and loss statement can provide infinite value to a restaurant owner. The best format to use allows the owner to understand his prime costs, total variable costs and the required contribution number necessary to cover fixed costs and desired profit.
Variable costs are those business related expenditures that vary in proportion to production. The most common examples of variable costs include raw materials, labor, packaging and distribution expenses related to producing and delivering the product or service.
‘Fixed costs’ is a business term used mostly in cost accounting. It has several meanings based on its usage. The most common definition associated with fixed costs is expenses that must be paid regardless of production or sales volume. The best example is rent for a company. It doesn’t matter whether you produce or sell one widget or several thousand, the rent must still be paid.
So why is it important to understand fixed costs? How is it used in cost accounting and in financial reporting? Finally, what are examples of fixed costs?
Service related businesses require a different format than the traditional profit and loss statement AKA the income statement. The traditional profit and loss focuses on sales of products and a corresponding cost of goods sold section to help the reader evaluate the gross margin. But in service, the owner needs a profit and loss statement formatted to key in on overall productivity and costs of that productivity.
