Financial Accounting

Everyone has a language for communication, conveying a message or understanding each other. The language through which a business speaks is called accounting. It is through which one understands a business.

A business’s health is measured by financial accounting. Financial accounts presents the past performance of the business. Using past performance one can take calculated measures to make future strategies.

Financial accounts are used not only by investors who have invested their money in the business but also other interested parties such as competitors, employees, customers, governments to collect income tax form the business etc.

Like a language is generated using letters and signs, financial accounts are generated using double entry book keeping. These double entry book keeping should follow certain rules called generally accepted accounting principles (GAAP).

That is why these accounts must be prepared by professionals who are qualified in these principles.

Profit and Loss

A business’s profitability is measured by the Profit and Loss Accounting (also known as Statement of Financial Performance). This accounting is done over a period of time known as the accounting period. The accounting period is usually monthly, bi-monthly, quarterly, half-yearly or annually.

It tells the income and expenses of the business. Income includes sales income, interest income, rental income etc. Expenses are the costs associated with generating these sales and typically include cost of goods sold (e.g. stock purchases, freight in, etc), operational expenses (such as rent, vehicle, salaries, utilities, insurance) and financial expenses (such as interest on loan, bank fees, etc).

The net result of the Profit and Loss Accounting will end up in a net profit or a net loss for that particular period. It is then the story of the business for that period resulting in success or failure.

Balance Sheet

The balance sheet (also known as the Statement of Financial Position) contains the entity’s assets, liabilities and owner’s equity.

Assets include items that the company owns such as cash, fixed assets (vehicles, furniture, buildings, land), debtors (accounts receivable), and stock. Liabilities include creditors (accounts payable), bank loans, and taxes. Owner’s equity is simply the difference between the assets and liabilities.

Cash Flow

The Cash Flow Statement shows how cash is generated by the business and how this cash is spent by the business. The resulting figure is the net cash of the business which is NOT equivalent to the profit or loss of the business. That is why a business should always prepare both Profit and Loss Account and Cash Flow Statement.

This net cash is equivalent to the cash at the bank and the cash on hand of the business as given in the Balance Sheet.

For the purpose of filing Tax Returns this statement is not required. However, we provide both these statements to our customers for their benefit.

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Financial Accounting