Accounting for the Small Business Owner - Where to Begin? Try the Primary Statements

Owners and managers of small businesses often have to be jack of all trades when it comes to running their own business. They need to be experts in their core business of course, be that web design, plumbing, baking, childcare or anything else. But they also need to turn their hand to marketing, administration, sales negotiation and staff recruitment.

Another area where a basic understanding will greatly benefit any business owner or manager is accounting and tax.

Of course, many business owners wisely trust their accounting, tax and vat returns to a suitably qualified accountant.

A quality Accountant should take pride in working with clients whatever their level or desire for understanding financial statements and always take the time to explain financial matters in plain English. It is important for a business owner to find an accountant who they are comfortable with and who will offer a service where they are always available to explain any financial matters that arise during the year.

A business owner or anyone who is thinking of starting a business who doesn't understand the primary financial statements is like an airline pilot who doesn't understand the instrument readouts in the cockpit. He could run the business and land the plane safely, but knowing how to read the vital signs along the way will help his business to flourish.

The starting point for anyone wanting to understand more about accounts would be the three primary financial statements - the Balance Sheet, The Profit and Loss account and the Cash Flow statement.

1. Balance Sheet - A summary of the financial position of the business at a certain period of time.
2. In plain English, this is a summary of the assets that you own, money that is owed to you, money that you owe to other people and the cash you have in the bank (or overdraft).
3. Profit and Loss account - A summary of income and expenditure over a given time period.
4. In plain English, this is summary of sales, cost of sales (eg purchases of stock) and expenses over a given time period, that when added together determines the Profit (or loss) for that period.
5. This statement can go by a variety of name such as the income statement, operating statement or earnings statement and is often abbreviated to the P&L Account
6. Cash flow statement- A summary of cash inflows and cash outflows for a given period. This report can tell the owners of a business how the cash position is developing which can be very useful in the management of a business.

Take note. 'The bottom line' is found in the Profit and Loss account, not the balance sheet.

Transform Accounting. The Essex Accountant

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