Category: Accounting

The act of preparation of financial statements, reports, tax documents required by businesses and individuals in their dealings with the IRS, SEC and local and state authorities. Some statements included might be profit and loss, interim statement and balance sheets. Most accounting is done in accordance with GAAP (generally acceptable accounting principles)

The Balance Sheet Tells Much About Your Business


A balance sheet is a quick picture of the financial condition of a business at a specific period in time. The activities of a business fall into two separate groups that are reported by an accountant. They are profit-making activities, which includes sales and expenses. This can also be referred to as operating activities.

There are also financing and investing activities that include securing money from debt and equity sources of capital, returning capital to these sources, making distributions from profit to the business owners, making investments in assets and eventually disposing of the assets in the manner best suited to meet regulatory guidelines.

Profit making activities are reported in the income statement; financing and investing activities are found in the statement of cash flows. In other words, two different financial statements are prepared for the two different types of transactions. The statement of cash flows also reports the cash increases or decreases from profit during the year as opposed to the amount of profit that is reported in the income statement.

The balance sheet is different from the income and cash flow statements which report, as it says, incoming of cash and outgoing cash. The balance sheet represents the balances – or amounts – of a company’s assets, liabilities and owners’ equity at an instant in time. The word balance has different meanings at different times.

Balance, as it is used in the term balance sheet, refers to the balance of the two opposite sides of a business, total assets on one side and total liabilities on the other. However, the balance of an account, such as the asset, liability, revenue and expense accounts, refers to the amount in the account after recording increases and decreases in the account, just like the balance in your checking account.

Accountants can prepare a balance sheet any time that a manager requests it. But they’re generally prepared at the end of each month, quarter and year. It’s always prepared at the close of business on the last day of the profit period. It can also be prepared quarterly, as a matter of course; and it is usually prepared in conjunction with a profit and loss statement.

Keeping Your Assets and Liabilities in Proper Balance


Making a profit in business is derived from several different areas. It can get a little complicated because – similar to monetary activities in our personal lives – business is run on credit as well. Many businesses sell their products and services to customers on credit, and as such, adhere to certain accounting principles.

Accountants use an asset account called accounts receivables to record the total amount owed to the business by its customers who haven’t paid the balance in full yet. Much of the time, a business hasn’t collected its receivables in full by the end of the fiscal year, especially for such credit sales that could be transacted near the end of the accounting period.

The accountant will record sales revenue and the cost of goods sold for these sales in the year in which they were made and the products delivered to the customer. This is called accrual-based accounting, based on the fact that it records revenue when sales are made and records expenses when they’re incurred as well.

When sales are made on credit, the accounts receivable asset account is increased. When cash is received from customers, then the cash account is increased and the accounts receivable account is decreased. The cost of goods sold is one of the major expenses of businesses that sell goods, products or services. Even a service involves expenses.

Therefore what this means exactly is what it says: The cost that a business pays for the products it sells to customers is the cost of goods sold. A business makes its profit by selling its products at prices high enough to cover the cost of producing them, the costs of running the business, the interest on any money they’ve borrowed and income taxes, with money left over for profit.

When the business acquires products, the cost of those products goes into what’s called an inventory asset account. That cost is deducted from the cash account, or added to the accounts payable liability account, depending on whether the business has paid with cash or credit.