Did you know that nearly 60% of small businesses in Australia fail within their first three years due to poor financial management, according to the research? It’s an interesting fact that underscores the importance of understanding your financial reports. In today’s fast-moving and highly competitive business world, having a clear view of your company’s financial position is not just helpful, but it’s crucial.
In this blog, we’ll explain two of the most essential bookkeeping reports: the Balance Sheet and the Profit and Loss Statement. These financial statements offer key insights into your business’s financial health, revealing how much you own, what you owe, how much you’re earning, and where your money is going. Therefore, it’s essential to create financial statements. However, if you are not familiar with these reports, you can get in touch with a bookkeeper in Melbourne to prepare them for you. By understanding and regularly reviewing these reports, business owners can make smarter decisions, improve cash flow, and avoid financial missteps that often lead to failure. Let’s break down these two vital reports and find out how they can help you build a stronger, more sustainable business.
What is a Profit and Loss Statement?
A profit and loss statement is also called an income statement, which monitors profits that remain after subtracting expenses from revenue within a specific accounting time period, which can be monthly, quarterly, or annually. It is also known as a revenue statement, earnings statement, statement of operations, operating statement, or statement of financial performance. In the profit and loss statement, the profit indicates net income or net profit.
What is a Balance Sheet?
A balance sheet is a financial statement, which gives you an insight into the financial position of a company at a specific point in time. It has two primary sections: assets and liabilities. Assets show what the company owns, such as investments, equipment, cash, and inventory. On the other hand, liabilities show the company’s debts and obligations to external parties, such as accounts payable, accrued expenses, and loans.
The equation of balance sheet shows that assets of a company are funded either by liabilities or by investments from equity. Shareholder’s equity is the residual interest in the assets of a company after subtracting liabilities. It shows shareholder’s net worth or ownership claim. With the help of a balance sheet, stakeholders evaluates the financial health of a company by checking its solvency, liquidity, and overall financial stability.
Difference between Balance Sheet and Profit and Loss Statement
When preparing financial statements, it’s crucial to understand their purpose. For example, the purpose of creating a balance sheet and an income statement is different.
- A balance sheet helps you when you maintain a cash flow statement, which tracks the cash flowing in and out of a company. On the other hand, the profit and loss statement shows a business’s ability to make a profit.
- Balance sheet shows whether the company has enough money to make payments when they come due. P&L statement is pretty straightforward. It can track expenses, revenue, assets, and other figures as they occur and produce these reports. Small business bookkeeper can help you create financial statements to help you stay ahead of your business finanes.
What are the Benefits of Creating Financial Reports?
It’s essential to create financial reports for your company, regardless of whether you have a small business or a large one. Here are some benefits of financial reports:
- To expand your business, you must know how your business is performing. Financial reports help you understand your company’s financial performance.
- Every business decision can make or break your business. Therefore, it’s essential to create accurate financial reports so you can make the right business decisions for business success.
- Failure to meet tax obligations can result in penalties from tax authorities. That’s why it’s essential to create accurate financial reports so your tax accountants can prepare and lodge taxes accurately and timely manner to avoid tax penalties. If you are unfamiliar with the taxation process, you can reach out to a tax accountant near you by searching ‘tax accountant near me’.
Conclusion
When creating financial statements, make sure you know the purpose of each financial report. Whether it’s the income statement, cash flow statement, or balance sheet, ensure you understand the aim of generating financial reports. By getting reliable bookkeeping services for your business, you can have peace of mind knowing that you will have accurate financial reports.