Maintaining Financial Records

• Financial Records allow businesses to track their success and help minimise risk, including:

  1. To make inform decision making
  2. To fulfil legal requirements
  3. To meet tax obligations
  4. To obtain funding or loans
  5. To enable business owners to manage their cash flow.
• Profit & Loss statements (income statement)

  • summary of the income earned and the expenses calculated
  • Allows business owners to see how much exact money has gone into the business (revenue), how much has gone out (expenditure) and how much can be derived as profit.

  Steps:

  1. Record the revenue (income)
  2. Record the cost of goods sold (inventory sold to customers)
  3. Calculate gross profit (revenue - cost of goods sold)
  4. Record and total the expenses (costs for running the business, e.g rent, electricity)
  5. Calculate the net profit or gloss (gross profit - expenses)
• Balance Sheets:

  • Shows the financial position of a business at a particular time
  • Value of assets:

  1. Current assets - used up or change value within a year
  2. Non-current assets - last longer than a year

  • Value of liabilities

  1. Current - repaid in less than a year
  2. Non-current - repaid in longer than a year

  • Owners equity - value of the business to the owners

  = Balance sheets should always be balanced - sum of assets must total the sum of liabilities and owners equity (assets = liabilities + owners equity)
• Cash Flow

  • A cash flow statement indicates the movement of: cash receipts (inflows - e.g money from sales) and cash payments (outflows - e.g payments for expenses)
  • A business is able to calculate its surplus or deficiet of cash = indicates a business' liquidity (the ability for a business to pay its short-term debts on time)