Accounting is the language and science of numbers in business. The process of small business accounting seeks to reduce the activities of business to basic measurements, that being a dollar value.  By doing this, it allows comparisons of such diverse activities as advertising, banking and the buying of inventory to be expressed in such a way as to make them comparable.

The process of accounting is designed in such a way that for every monetary transaction that takes place, a record for that transaction occurs. These monetary transactions are reflected in financial statements, and are usually composed of three different statements, each with its own purpose. Expressed in a common format – dollars – it shows the results of every decision made in the past, so that informed decisions can be made for the future. The major statement is the income statement, sometimes called the profit and loss statement or P&L. This statement of small business accounting summarizes the results of operation for a given period of time. In business it is not where you have been, but rather where you are going. The income statement will help with in this determination.

The second major product from the process of small business accounting is the balance sheet. This is usually referred to as a snapshot of the financial position of a small business at a point in time.  At the end of a period (year or month), the accounting system should allow for an examination of exact position in terms of what is invested in the company, what is owed to investors or external stakeholders, and what is actually owned outright. This statement is used periodically to examine the advancement of the business in terms of increasing its assets and to better understand what resources are available to the company in order to conduct business.  Typically, financial institutions, creditors and investors are interested in this statement to help them understand the actual worth of a business.

The last statement is called the cash flow statement or source and application of funds. This statement shows how the company took in cash and how it was spent. The cash flow statement effectively ties together the Income Statement and the Balance Sheet, and expresses it in terms of the change in your cash position. A bank statement will tell you this, but it will not tell you the “how” and “why” of the change. Adjusted net income, for instance, is your net cash position from the operation of your business. You may have paid down some debt, and this would be shown as a use of funds. This discussion touches on the very basics of small business accounting and its associated products. Relying on partial information or simply the basis can often be detrimental to a small business and investments. Gaining the support and expertise of an experienced accounting professional is critical to ensure business runs smoothly. As previously mentioned, accounting is a science. Having the expert tools and knowledge right at the start will help avoid costly mistakes and errors for future business. It’s a small price to pay to help save big later.

This article was written by Chrissy Laudenslager, on behalf of RBZ, offering the most reliable accounting services to small businesses. To know about small business accounting rules, you may also visit eHow. 

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