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The Bottom Line Of Financial Accounting In Business

At an early point on your quest to start a business, you will need to do some basic financial accounting. The accounting will force you to realistically look at your business from a “dollars and cents” perspective. Financial accounting is important because it allows the tracking of income and expenses, which gives an overall picture of the financial health of the business and helps to account for what your business has done historically, what it is currently doing, and what it is forecasting for the future.

Recording transactions, dates, and sources of every revenue and expense you generate is called bookkeeping, and it must be accurate, and it should be done regularly. The old saying “garbage in – garbage out” is critically relevant in a financial view of your business.

Most entrepreneur’s do their financial tracking into a simple monthly Profit & Loss (P&L) statement. (a.k.a. Income Statement) The P&L is broken into three major headings. Revenue, Expenses, and Profit / Loss.

  • Revenues– this includes all money (cash, credit cards, checks, etc) you receive for the month including product sales, service sales, commissions, royalties, etc..
  • Expenses – expenses are those items you have to pay out for the month including the materials, labor, and all other costs such as advertising, marketing, automobile, insurance, outsourced accounting, legal, rent, utilities, and any other business expenses yo may incur in the month.
  • Profit / Loss – this is the resulting number by adding up all your revenues and subtracting all of your expenses in a month. The number can be positive (Profit)…or negative (Loss) at the end of the month.

In our example, we are going to use a simple “cash basis’ scenario meaning all your sales (revenues) are received immediately at the time of the sale, and all your costs (expenses) are paid when you pick them up. Below is a simple example of a monthly P&L statement.

Revenue

Product Sales     $ 1,000

Service Sales     $ 4,200

Commissions      $   300

Total Revenue    $ 5,500

 Expenses

Materials              $ 500

Labor                   $ 2,200

Marketing             $ 300

Auto                     $ 400

Fuel                      $ 100

Rent                      $ 1,000

Utilities                  $ 200

Accounting             $ 200

Legal                     $   200

Total Expenses  $ 5,100

Profit / Loss            $ 400

Therefore, Total Revenue of $5,500 -$5,100 in Total Expenses leaves a Profit of $ 400.  That’s the bottom line.

Marco Polo
Marco Polo is the admin of sparebusiness.com. He is dedicated to provide informative news about all kind of business, finance, technology, digital marketing, real estate etc.
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