Basics Of Company Finance
If you are planning to start something on your own, you need to have the financial background to understand the accounts of your company. You don’t need to be an expert in the finance but should have a fair idea about basics of finance. The accounts are like a window which shows how the business is performing. Below mentioned are few accounting terms one need to be familiarized with before opening up a business.
Understanding company accounts
The annual company account gives a summary of all the financial transactions of the company that happened in one year. The key financial statements of a company are cash flow statement, profit and loss statement and balance sheet.
Cash flow statement– This statement explains the movements of cash in the business over a period of one year. The amount of money which keeps coming in and going out of the business will be recorded here. The cash flow will be recorded only when the business actually receives the cash. Cash flow can be further divided into 3 parts:
Investing activities- The amount of money invested in capital expenditure like new equipment.
Financing activities- The amount of money spent on financing activities like cash raised by selling shares. However, the trading conducted by the owner of the organization in shares, currencies, etc should be treated separately and should not be combined with the company finances. As with the advent of technology, many people are into trading of digital currencies with help of trading robots. But the income earned from these activities should not be shown under company income. As a company and the owner are two different entities.
Operating activities- Cash coming from the sale of goods or services less the cost of goods sold.
Profit and loss account- This statement states the total revenue earned and also the total expenses incurred by the organization throughout the financial year. It gives you clarity on how much money you are spending to meet all the expenses and the actual income earned for the period. It helps you in arriving at the profit or loss made for the period.
Balance sheet– This statement gives a snapshot of the business’s assets, shareholders equity and the liabilities at a particular period of time. The company’s financial health can be ascertained at the time when the accounts are generated. It comprises of two things:
Assets- The things owned by the business
Liabilities- The obligation of the business