The compilation of financial statements may seem to be a daunting task. Though outsourcing the function is certainly recommended, we provide basic information to help you create some of the financial statements needed for your business below.
Compiling the Profit and Loss Statement
Otherwise known as the income statement, it is the reporting of the business financial results regarding business operations for a particular period. One can describe it as an accurate record of what has happened in a particular financial year. To calculate the profit and loss, you will have to match the revenue from providing services and selling products, against the expenses associated with the delivery of the said services or products.
Every profit and loss statement should at least include the net sales, showing the main source of revenue from your customers for the products or services you have supplied. Note that the element includes the total you have received after subtraction of returned products and with consideration for price reductions. The statement furthermore needs to include the operating costs, which refer to the expenses associated in converting the raw products into the products you have supplied. In addition, the statement must include your operation profit, which is the net sales after operating expenses have been deducted.
The three remaining elements to be included are that of interest revenue, interest expenses and income tax provision. The interest income element refers to the income you have made from investments, while the interest expense is the interest that you have paid on credit. The income tax element refers to the amount of income tax that is payable.
You also need to create a balance sheet as part of the process of compiling financial statements. This sheet shows the financial state of your business at a particular date, such as for the month of April 2015. Think of it as a photo that shows how the business has been doing at a particular date. It includes reporting on the assets you had available to conduct the economic operations and the liabilities against the assets. To get to the owner equity, you need to subtract the liabilities from the assets – the formula for this is assets equal claims plus owner equity.
Note that the balance sheet must include the assets, liabilities and owner’s equity. The assets refer to resources you had available at the set time, such as movable and immovable property, equipment and debts owed by your customers, as well as any money in the bank in addition to patents. Liabilities refer to your business obligations to pay for services or products at a particular time in the future. The element furthermore includes all the debt you owe to creditors. The interest you have in the business is the owner equity.
As part of the balance sheet, you will also address elements such as the current assets, fixed assets and depreciation of the assets, as well as the current liabilities, notes payable, accrued costs payable, income tax due and long-term liabilities. The current assets must include all the assets, including cash which will be turned into cash within the next 12 months. The fixed assets are all the assets that you don’t intend to sell as part of operation and include from land to structures, and equipment. The depreciation refers to the decline in value on the fixed assets.
Current liabilities are the debt due in the next 12 months, while accounts payable refer to the amounts you owe on a regular basis for products and services. The notes element is the money you must pay to a creditor or bank for which you have provided a promissory note, while accrued expenses refer to salaries and money payable to your workers, as well as the interest on money borrowed in addition to premiums.
Income tax is the tax that you must pay, while the long term liabilities refer to debts that will still be payable after 12 months from creation of the balance sheet.
It is important to keep the balance sheet and the profit and loss statement up to date as this will help you in business decision making and to ensure that the statements are ready for investors or SARS when required. As this can take up a lot of your time and can become a complicated process, we recommend making use of our services at The Tax Shop regarding accurate compilation of financial statements.