Financial Reports – P/L & Balance Sheet

When it comes to the world of accounting, some of the most common reports include the profit and loss report and the balance sheet. Whether you are working with someone or trying to figure out your finances on your own, knowing all about these reports can be beneficial to improving your finances.

What is a P/L and Balance Sheet Report?

A profit and loss (P/L) report can capture how much money you’re making (or losing) within a certain time period. (A month, quarterly, a year, etc.) A P/L report may also be known as an income statement, statement of earnings, or statement of operations. Some key components of a P/L report are revenue, cost of goods sold (COGS), Gross profit, Expenses, and Net profit(loss). Revenue is how much money you’ve made without including any COGS or expenses. COGS are the costs for your business to deliver goods and services. This includes things like materials, labor, and shipping. Gross profit is the money you’ve made by subtracting COGS from your Revenue. Expenses are split into two categories: Direct & Indirect. Direct expenses are typically COGS as they are the items needed to make/deliver the service. Indirect expenses include things like utilities, rent, and fuel. Indirect expenses will never be counted as COGS. Net profit is the remaining money after you have subtracted COGS & expenses from your revenue. Net profit would be the actual profit (or loss) for your business in said time period. nn The balance sheet is the overall financial position of the business. It shows what you owe as well as what you own. This is determined by assets and liabilities. An asset is something you own. There are two types of assets: Current and noncurrent. Current assets are anything that can be converted into cash within a year whereas noncurrent is anything that takes longer than a year. There are also current and noncurrent liabilities as well. With current liabilities being items due within a year and noncurrent due after a year.

How do these reports help me determine my finances? How do I use them effectively?

The P/L report is a clear way to see whether you have gained or lost money that month. Additionally, the P/L report allows you to see what expenses are costing more and see how often money is coming through. This is beneficial because it can make predicting future revenue trends more accurate, thus allowing you to budget better and stay on track with your goals. nn The balance sheet is helpful for quite a few reasons. For one, it can help you decide if you are able to expand your business by knowing if you can manage the money that floats in and out or if you need to focus on receiving more cash. Another way the balance sheet is useful is by helping the company see if they are prospering or failing. This can give way to a company changing its policies, correcting more mistakes, and refocusing its goals to better align with the state of the business. Additionally, the balance sheet is important to potential investors or those looking to buy your company because it allows them to see whether the business is worth the investment since you can see everything due, paid, and what the business is like without these things.

Financial reports are helpful

Although there are many ways to look at financials in a business, knowing the fundamentals of the P/L report and the balance sheet is a very helpful step in knowing the state of your business

Accountant Lingo & Finding the Right Accountant

In last month’s blog, we covered the benefits of having an accountant and what the difference is between CPAs, accountants, and bookkeepers. Now the question is “Where do I even start when looking for the right accountant?” Everything in the accounting realm can be confusing at first or it may simply take up too much of your time. Gaining an understanding of basic terms in accounting may help you feel more secure in your business and even help you find the right accountant.

Finding the right Accountant

If you’re considering an accountant, you may have no idea where to start. A good place to start is overall communication and guidance. Having an accountant should be a vital part of your team and they should be willing to work with you and help you really understand the money side of your business. This means detailing the explanations for any questions you may have and teaching you aspects of money handling so you are able to do some things on your own later on (if needed/desired.) Having good communication goes in hand with availability. Having someone you can never get ahold of can make it frustrating for you in the long run. Remember that relationships are a two way street and everyone should have a good relationship that works for both parties.

Although there are many questions to consider asking an accountant before you hire them; we are only going to review a few that will aid in finding the right accountant for you. Are they willing to teach you about finances and do they offer additional consulting if needed? Do they offer standard packages or can they customize services based on your needs? Are they able to help with 1099s and any further subcontractor needs? Do they have any specialities? When looking at bigger firms it may also be worthwhile to ask if they outsource any of their work or if they perform it personally and if they don’t perform it personally, will the person you deal with change? Will you get a regular person to discuss your finances with?

After hiring an accountant, you’ll want to really dig deep and work towards the best financial plan you can for your business. Here are some things to think about when deciding what you need. For one, contemplate what taxes you’ll need done and what records you need to keep for filing and in case of audits. Whether you do or don’t know what taxes need to be done for your business, an accountant can help you figure it out or even file for you (in most cases.) Next, you’ll want to work with them to better manage your cash flow and know your breakeven point. A break-even point is when sales and expenses are equal. It’s essential to know your break-even point because it can help you figure out a pricing strategy and make your budget more accurate. Working with an accountant should improve your business by figuring out what changes your business needs.

Understanding common terms in Accounting

When you’re new to the accounting world, there are many terms that you may be lost on. Although your accountant should be willing and able to review any terminology you don’t understand, learning some of the basic accountant lingo for yourself can be beneficial to helping you grasp more of the financials of your business. Let’s begin with assets and liabilities. Assets and liabilities show how much your business is worth. Assets are property (either tangible or intangible) that adds value to your business. Assets could include things like inventory, (paid off) vehicles, and even your brand value. Liabilities are any long-term or short-term monies your business owes. Examples of liabilities include credit card payments, bank fees, and loans. Additionally, accounts receivable is an asset while your accounts payable is a liability. Accounts receivable (AR) is the money you owe to any person/vendor while accounts payable (AP) is the exact opposite (so money owed to you by people/vendors).

Another thing you’re going to see or hear about a lot is P/L reports and the balance sheet. P/L stands for Profit and Loss. A P/L report is a report showing all the expenses and income you had in a certain period of time. The balance sheet shows the business as it currently stands including all assets, liabilities, and equity. Equity is money remaining after all liabilities are gone and all assets sold. It basically shows the owner(s)/investor(s) stake in the company. Just like there are different types of assets and liabilities, there are also different types of equity in a business. You can run both P/L reports and balance sheet reports by month, week, yearly, or any other custom setting to find a time you’re looking for.

Accountants and all their terms

Knowing what you’re looking for in an accountant can elevate your business even higher. Don’t forget to check out last month’s blog for all the reasons why having an accountant is valuable in your business! Additionally, having a basic understanding of frequently used accounting terms helps you better understand the money going through your business and further your involvement in your finances with your accountant.

Accountants vs. CPAs vs. Bookkeepers

Accountants, CPAs, and bookkeepers- We’re sure that you hear these words all the time. In the world of accounting, these titles are often bounced around and sometimes interchangeably. Even though they all do many of the same tasks, they are different and it’s important to know their differences.

Accountants, CPAs, and Bookkeepers – What’s the difference?

Let’s start with bookkeepers. Bookkeepers are usually the basis for accounting in business. There is no formal training required to become a bookkeeper and they typically work under accountants. Bookkeepers handle the daily financial transactions and usually other tasks like: payroll, loan payments, creating invoices, and billing. They also create financial reports that an accountant can then review with a client. So onto accountants, accountants can do everything a bookkeeper does but they also have other responsibilities. Primarily, they are there to help with long-term financial planning and any other financial consulting advice. This means that atop of overseeing bookkeeping tasks, they can: create and review budgets, correct any accounting discrepancies, calculate tax liabilities, and give tax advice. Finally, we have CPAs. CPAs are also known as certified public accountants. They can do any tasks that a bookkeeper or accountant can do but CPAs are the only ones who work with the IRS which means they are the only ones that can file yearly taxes for you. Not all accountants are CPAs but all CPAs are accountants. This is because in order to become a CPA, one must have a bachelor’s degree in accounting, a certain amount of hours under a CPA (hours dependent on the state), and pass the CPA exam.

It may be time to consider hiring a professional if your taxes are too complex, accounting is taking up too much of your time, or if the business is growing up. When it comes to choosing the right professional for you, most people go with an accountant. This is because accountants are usually more cost-effective than a CPA and more often than not, they already work with a bookkeeper. Although this does mean you still have to have someone file your end of the year taxes (or you can do it yourself), it can make it a lot easier when you have an accountant who is taking care of your books all year.

The benefits of Accountants

Many of us love to save money any way we can by doing things ourselves. If your business is small enough, this may not be a problem when it comes to accounting for you. In general though, it is always a good idea to have an accountant for your company. For starters, having an accountant can actually save you money because they can let you know where money is being overspent and what software/programs could save you when doing payroll, inventory, and more. Not having immense knowledge in accounting could also cost you more when it comes to taxes. Common reasons people lose more money in taxes is because they file late, miscalculate their tax bill, or lose out on tax breaks by not claiming them. Next, one of the biggest upsides to having an accountant is that they save you time. If you make any mistakes, it could take hours to fix that could be avoided or handled by an accountant. Also, when you have more time, you can focus on generating more sales or simply putting more time into needed areas of your business. Furthermore, many people use their free time at home to crunch numbers and do all their accounting. This free time could now be used to focus on their families even more or their personal life in general. After this, having a long-term accountant comes with its own set of advantages. If your accountant has been in the industry for a long time, they usually have a vast network of different business professionals. This means that the accountant may have more knowledge on your profession and if they don’t, they can reach out to a specialist in their network and get the help they need to help you. Finally, as the accountant learns more about your books, they become a specialist for your business. They will start to see trends, places to improve, and what could be damaging if continued. They grow with your business and will be able to better predict how new products (or other big business changes) will affect your business.

In Summary

No matter what accounting professional you choose, spend time picking the right one as they save you time, money, and peace of mind!