Financial Records and Financial Statements
Goals:
Key Terms:
Financial Records – Budgets reflect the financial plans of businesses. To determine if those plans have resulted in success, financial records are needed. Financial records are used to record and analyze the financial performance of a business. Several types of records are maintained. They provide detailed information about the financial activities of the company.
Types of Records – The following are commonly maintained to document the performance of a
business.
Assets records name the buildings and equipment owned by the business, their original
and current value, and the amount of money owed if money was borrowed to purchase
assets.
Depreciation records identify the amount assets have decreased in value due to age
and use.
Inventory records identify the type and number of products on hand for sale. Adequate
records are crucial to correctly determine the number of products sold, damaged, or
lost and the current value of that inventory.
Records of accounts identify all purchases and sales made using credit. An accounts
payable record identifies the companies from which credit purchases were made and
the amount purchased, paid, and owed. An accounts receivable record identifies
customers that made purchases using credit and the status of each amount.
Cash records list all cash received and spent by the business.
Payroll records contain information on all employees of the company, their
compensation, and benefits.
Tax records show all taxes collected, owed, and paid. As a part of payroll, employers
must withhold a percentage of employees’ salaries and wages for income taxes, Social
Security and Medicare taxes, and, in some cases, unemployment compensation
insurance. In addition to the taxes withheld from employees, businesses must pay the
employer’s share of Social Security and Medicare taxes, and other taxes that are
calculated as a percentage of payroll. Depending on the type of business and the
location, a company may have to collect and pay state and local sales taxes. Businesses
may also have to pay several types of taxes on their income and the value of their
assets.
Maintaining Financial Records – Business records have to be accurate and should be kept up to
date. In the past the preparation and maintenance of financial records was an expensive and
time-consuming process. It was often done manually using paper documents that had to be
carefully completed, saved and protected.
Technology is changing the way financial information is collected. Much of the information is
now collected using point-of-production and point-of-sale technology such as scanners, touch
screens, and personal digital assistants (PDAs). Data is transferred from the place it is collected
to the computers of the people who prepare the financial records. Technology is also changing
the way financial records are prepared and maintained. Businesses are computerized financial
systems that have templates for each financial record. The software completes the necessary
mathematical calculations. It updates records and compares those records with budgets. The
software can even complete what-if comparisons to help managers determine the impact of
changes and financial performance.
Financial Statements – The three most important elements of a company’s financial strength are its assets, liabilities, and owner’s equity. In simple terms, assets are what a company owns, liabilities are what a company owes, and owner’s equity is the value of the owner’s investment in the business.
Reports that sum up the financial performance of a business are financial statements. A company reports its assets, liabilities, and owner’s equity on the balance sheet.
Three other key financial elements for a business are the amounts of sales, expenses, and profits. Sales, expenses, and profits (or losses) for a specific period are reported in the company’s income statement.
The Balance Sheet –The assets, liabilities, and owner’s equity for a specific date are listed on
the balance sheet. The balance sheet is usually prepared every six months or once a year.
The left side of the balance sheet lists all assets. Assets are anything of value owned by a
business. There are two common divisions of assets. Current assets include cash and those
items that can readily be converted to cash such as inventory and accounts receivable. Long- term assets (also know as fixed assets) are the assets with a lifespan of more than a year. Common fixed assets are land, buildings, equipment, and expensive technology.
The right side of the balance sheet is divided into two categories. Liabilities are amounts owed
by the business to others. As with assets, there are two types of liabilities. Current liabilities are
those that will be paid within a year. Long-term liabilities are debts that will continue for longer
than a year. Current liabilities include payments owed to banks and other financial institutions
for short-term loans. Also included are payments due to suppliers for inventory purchases,
supplies, and inexpensive equipment. Lonf-term liabilities are debts owed for land, buildings,
and expensive equipment.
Owner’s equity is the value of the business after liabilities are subtracted from assets. It shows
how much the business is worth on the date the balance sheet is prepared. Another way of
looking at owner’s equity is that it shows the value of the investments owners have made the
business.
The Income Statement – To report the revenue, expenses, and net income or loss from
operations for a specific period, a business prepares an income statement. An income
statement usually covers six months or a year, but may also encompass a shorter period such as
a month.
Revenue is all income received by the business during the period. Sources of income include the
sale of products and services, plus interest earned from investments. Expenses are all of the
costs of operating the business during the period. Expenses include things such as rent, supplies,
inventory, payroll, and utilities. The business has net income when revenue is greater than
expenses. A net loss occurs when expenses are greater than income.
Business managers review financial statements carefully to determine how their businesses are
performing. Because the statements summarize financial performance for a specific time, the
owner can compare the performance of the current period with the performance of the last
month or the last year. If the value of assets is increasing in relation to liabilities, the business is
in a better financial position. A rapid rise in liabilities or decline in owner’s equity should cause
concern. In addition to comparing financial performance from one time period to another, the
owner will want to make comparisons with similar businesses. A business that is less profitable
than similar businesses, or with lower sales or higher expenses, may have difficulty competing.
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