Understanding Financial Records

The purpose of any business financial recordkeeping system is to provide a clear vi¬sion of the relative health of the business, both on a day-to-day basis and periodically. Business owners themselves need to know whether they are making a profit, why they are making a profit, which parts of the business are profitable, and which are not. This information is only available if the business owner has a clear and straight-forward rec-ordkeeping system.
 Business owners also need to be able to produce accurate financial statements for income tax purposes, for loan proposals, and for the purpose of selling the business. Clear, understandable, and accurate business records are vital to the success of any small business. In order to design a good recordkeeping system for a particular business, an understanding of certain fundamental ideas of accounting is necessary. For those unfamiliar with the terms and concepts of accounting, grasping these basic ideas may be the most difficult part of accounting, even simplified accounting.

First, let’s get some of the terminology clarified. Accounting is the design of the recordkeeping system that a business uses and the preparation and interpretation of reports based on the information that is gathered and put into the system. Bookkeeping is the actual inputting of the financial information into the recordkeeping system. The purpose of any business recordkeeping system is to allow the business owner to easily understand and use the information gathered.

Certain accounting principles and terms have been adopted as standard over the years to make it easier to understand a wide range of business transactions. In order to understand what a recordkeeping system is trying to accomplish, it is necessary to define some of the standard ways of looking at a business. There are two standard reports that are the main sources of business financial information: the balance sheet and the profit-and-loss statement.
© Nova Publishing Company, 2005