Monday, 19 Sep 2022
The financial statement of a business is a legal document that contains information about its financial status, including assets and liabilities. The data is needed to assess the entity’s stability and understand its bottom line. Experienced bookkeepers Melbourne utilise it to forecast future earnings and spending and offer insightful advice to the business owner related to investments and other endeavours.
Thus, a financial statement is a highly vital document that needs to be prepared by every business. There are three types – balance sheet, profit and loss statement and cash flow statement. These are required when taking out a loan, attracting investors, filing taxes and making crucial business decisions. They are created with the help of the records of daily transactions maintained by the bookkeeper. So, here is how you can make financial statements for a small business in Melbourne.
A balance sheet is a financial statement that presents the value of assets, liabilities and shareholder’s equity for a given period. Assets represent the valuable things that the company has acquired are written on the left side of the document.
These include the equipment cost, the present inventory value, cash available in the business bank account and other valuable items. They can be tangible and intangible. While tangible items are physically present in the business, intangible assets are non-physical, such as goodwill, copyrights and trademarks.
Liabilities are the debts owed to moneylenders, suppliers, etc. They are written on the right side of the document and include bank loans, taxes, credit card bills, rent and other expenses. Shareholder’s equity is the part of the business that belongs to the owners, and it is calculated by deducting the total liabilities from total assets.
Small businesses that do not have shareholders refer to it as owner’s equity. Thus, the balance sheet helps the entrepreneur in Melbourne to know how much money is needed to manage the liabilities and how much value have they created through investments.
The bookkeeper prepares the balance sheet monthly, quarterly or annually, depending on the requirement of the business and its size. To make the document, the bookkeeper uses all the records of transactions, such as invoices and bills, and these are categorised in three sections – assets, liabilities and equity.
The assets are further classified into current and non-current assets on the balance sheet. Current assets can be turned into cash in the current period, while non-current assets cannot be turned into cash in the same year. Similarly, liabilities are also categorised into current liabilities, which are to be paid in the same year and non-current liabilities, which can be paid over the years.
These days bookkeepers use accounting software in Melbourne to create a balance sheet which helps to reduce the burden of the time-consuming task. After the assets and liabilities are listed on the left and right sides of the sheet, the equity is calculated and the total on both sides is balanced.
The business owner uses the document to identify the entity’s net worth and capital requirements. The bookkeeper uses the balance sheet to calculate the financial ratios needed to determine the business’s financial health. These include debt-to-equity ratio, working capital ratio and others.
The profit and loss or income statement offers details of the revenue and expenses for a given period. It is prepared monthly, quarterly or annually by the bookkeeper to assess the performance of the business. It consists of revenue, expenses, operating income, net income, cost of goods sold, gross profit, earnings per share and depreciation.
It helps the entrepreneur in Melbourne to identify the projects and products that are making money and those that are eating resources without generating profits. Thus, they refer to this document to eliminate the non-profitable activities and use their budget for investment into those tasks that are generating revenue.
The bookkeeper calculates the total revenue of the business and the cost of goods sold, which should include the capital utilised in producing and selling the products or services in Melbourne. They deduct the cost of goods sold from the total revenue to determine the gross profit for the defined period.
The next step is to identify the total operating expenses, which include rent, utilities, etc. The operating expenses are deducted from the gross profit to ascertain the total income. Then, the bookkeeper calculates the applicable business and payroll taxes and interest on the debts. The interest and taxes are then deducted from the total income to get the net income of the Melbourne-based business.
The cash flow statement provides the details of the inflow and outflow of capital during a defined period. It also gives the ending balance amount, which helps the management analyse the financial well-being for making informed decisions.
Your bookkeeper in Melbourne will begin the process by identifying the starting balance or the available cash from the income statement when the reporting period begins. The next step is determining the cash generated by business operations, investment, and financing activities.
After all the cash generated by the business in Melbourne from different activities has been calculated, the bookkeeper will determine the ending balance of cash at the end of the reporting period.
It informs about the cash gained or lost by the business in the given period. If the cash flow is positive, the business generates profits and performs well. Conversely, if it is negative, the business needs to improve its income and reduce expenses to stay afloat.
Financial statements are vital for making business decisions and understanding where the money is going. Without this information, entrepreneurs in Melbourne cannot function. These documents are the roadmap that guides them to move forward with the required financial knowledge.
