Annual Financial Accounts Made Easy
Not many business owners understand financial accounts, which is a shame, as it is important to get to grips with the financial situation of your business beyond whether there is enough money in the bank to take your drawings or pay your bills. Many of my clients think that their previous accountants made their accounts as long and as confusing as possible to try and justify their fees so I make mine short and simple which I find helps my clients immensely.
There are really only three important parts to a set of Annual Financials:
The Trading and Profit and Loss Account. Also known as a Statement of Financial Performance, this tells you what profit you've made over the last year. Profit of course is not what cash has been generated or left in the bank, it's the financial gain made measured by deducting all your costs and expenses from your revenue. It's the key performance measure for any business.
Balance Sheet. Also known as a Statement of Financial Position, this is a "snapshot" of your business on that particular day. It shows you the values of your assets, what you owe to others and what equity you have invested in the business. It's particularly important to get the Balance Sheet correct, as then the difference between the current equity and the equity shown in the previous Balance Sheet must equal the profit made over the year.
Your Advance, Current, Proprietor's or Shareholder's Account. Sorry about the multiple names but this shows you how much money the business owes you (or how much money you owe the business). It should show the balance brought forward, any additional advances to your business and any amounts withdrawn from the business.
The rest of the Annual Financials are generally just superfluous and so can be ignored. Why on earth, for example, waste time and money setting out who owns the company or the terms or security of bank loans? Don't you know this already? If you're not getting your accounts demystified or simplified it's time to change your accountant - you'll probably save some money too!
If you have any tax or business queries of any kind telephone 0800 ASK NICK, e-mail me at email@example.com or use "Contact Us" on www.abac.co.nz. The information in this article is of a general nature and should not be relied upon as a substitute for specific advice.