Let’s talk about financial statements. Probably something that you know you need to be looking at regularly, but struggle to understand, unless you have a financial background.
There are two key financial statements which we use in accounting to provide insights into a company’s financial performance. They are the Profit and Loss Account (or P&L) and a Balance Sheet.
In this blog we’ll talk about what they are both used for and what needs to be included in each.
Profit and Loss (P&L) Statement
Also referred to as an income statement or a statement of earnings, a profit and loss statement or P&L as it’s known for short, show’s a company’s revenue, costs and expenses during a specific period. We usually run these reports for our clients at the end of each month or once per quarter and then again at the end of the financial year.
A P&L Statement helps to analyse the profitability of a business by calculating the net income or loss. Typically a P&L statement will include revenue/sales, cost of goods sold (COGS), gross profit, operating expenses, taxes and net income.
Balance Sheet
A balance sheet is often referred to as the statement of financial position. It provides a snapshot of a company’s financial position at a specific point in time, showing assets, liabilities, and shareholders’ equity.
A balance sheet is created using the accounting equation of Assets = Liabilities + Equity. In the UK you are likely to see a balance sheet reported in your accounting software in the format of Net Assets (Assets less Liabilities) = Equity
- Assets are things that the company owns.
- Liabilities are what the company owes
- Equity is the shareholders ownership.
Chart of Accounts
In order to produce these reports for our clients we use a Chart of Accounts (COA).
A COA is a list of all the accounts you must use to record financial transactions in your business. It helps you keep track of where money comes from and goes.
A chart of accounts is integral to your bookkeeping, accounting, and financial reporting. They’re like a map that helps you categorise your transactions correctly and group similar accounts together for reporting.
The chart of accounts is divided into:
- asset accounts – where you record things that the business owns
- liability accounts – where you record debts that the business owes
- equity accounts – where you record the funds introduced into the business and drawings by the owner(s)
- revenue accounts – where you record money received by the business
- expense accounts – where you record money paid by the business
If you choose Numberwork Services as your bookkeeper we will have a chat about your COA before we start to work together. This will ensure that we are recording things in a way that makes sense for you.
Bookkeeping isn’t just about recording transactions, it’s about analysing the data so that you get a better insight into the future of your finances.