The Pure Bookkeeping System
Understanding your Financial Reports
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Three Types of Reports
The Balance Sheet
The Profit and Loss
The Cash Flow Statement
The Balance Sheet
What is the Balance Sheet used for?
Why is the Balance Sheet important?
Balance Sheet Terminology
1. Assets
2. Current Assets
2.1 Bank Accounts and Cash
2.2 Accounts Receivable (Trade Receivables)
3. Fixed Assets
3.1 Land
3.2 Buildings
3.3 Office Equipment
3.4 Machinery
3.5 Vehicles
3.6 Total Fixed Assets
4. Total Assets
5. Liabilities
6. Current Liabilities
6.1 Accounts Payable (Trade Payables)
6.2 Loans
6.3 Payroll Liabilities
6.5 Inter-Company Loans
6.6 Total Current Liabilities
7. Long Term Liabilities
7.1 Loans
8. Equity
9. Owner’s Equity
9.1 Retained Earnings
9.2 Current Year Earnings
The Profit & Loss
Profit and Loss Year to Date for Month
Profit and Loss Multi Period Spreadsheet
Profit and Loss (Accrual)
Other Reports
Health Check
Why do a Health Check?
How often do I need to do a Health Check?
How to do a Health Check
Step 1 Confirm Bank Accounts & Credit Cards Reconcile
What to look for?
Step 2 – Reconcile Trade Receivables
What to look for?
Problems when there figures aren’t “real”
Problems when there is an “Out of Balance”
Reasons for an Out of Balance
Step 3 – Reconcile Trade Payables
What to look for?
Problems when there figures aren’t “real”
Problems when there is an Out of Balance
Step 4 – Reconcile Source Deductions
Payment of Source Deductions
Problems with non payment or late payment of source deductions
Reconciling the Source Deductions
How to Make your Business a Lean Mean Fighting Machine
Customers
Stock
Accounts Receivables
Accounts Payable
Costs and Overheads
How to Keep the Cash Flowing in your Business
Margins
Accessing Credit
Cashflow and Working Capital
Where is the cash?
Housekeeping
Business Records to Keep
Filing Trays
Lever Arch Folders (Filing Binders)
Financials Folder
Receivables Folder
Unpaid Receivables
Payables Folder
Unpaid Payables
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The Pure Bookkeeping System
Information for Clients
Disclaimer
We have used our best efforts in preparing this manual for the benefit of small business owners. We make no representations or warranties with respect to the accuracy or completeness of the contents of this manual and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. The accuracy and completeness of the information provided herein and the opinions stated herein are not guaranteed or warranted to produce any particular result and the advice and strategies contained herein may not be suitable for every individual.
Therefore the authors shall not be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential or other damages.
Copyright
Copyright ©Pure Bookkeeping 2014. All rights reserved. No part of this manual including interior design, cover design and icons may be reproduced in any form by any means (electronic, photocopying, recording or otherwise).
Three Types of Reports
The three financial statements that are used together to present a complete picture of a company's finances are:
The Balance Sheet
The Balance Sheet is one of the most important pieces of financial information issued by a company. It is a snapshot of what a company owns and owes at that point in time.
The Profit and Loss
TheProfit and Loss, on the other hand, shows how much revenue and profit a company has generated over a certain period.
The Cash Flow Statement
The cash flow statementdescribesthe inflow and outflow of cash throughout the period.
The Balance Sheet
A Balance Sheet is a snapshot of a business’ financial condition at a specific moment in time, usually at the close of an accounting period. A Balance Sheet comprises assets, liabilities, and owners’ or shareholders’ equity. Assets and liabilities are divided into short and long-term obligations including cash accounts such as banks, money market, or stock securities and bonds.
It's called a Balance Sheet because the two sides balance out. This makes sense: a company has to pay for all the things it has (assets) by either borrowing money (liabilities) or getting it from shareholders (shareholders' equity).
What is the Balance Sheet used for?
A Balance Sheet helps a small business owner quickly get a handle on the financial strength and capabilities of the business.
- Is the business in a position to expand?
- Can the business easily handle the normal financial ebbs and flows of revenues and expenses?
- Or should the business take immediate steps to bolster cash reserves?
It can identify and analyze trends, particularly in the area of receivables and payables.
- Is the receivables cycle lengthening?
- Can receivables be collected more aggressively?
- Is some debt uncollectable?
- Has the business been slowing down payables to forestall an inevitable cash shortage?
Balance sheets, along with income statements, are the most basic elements in providing financial reporting to potential lenders such as banks, investors, and vendors who are considering how much credit to grant the company.
Why is the Balance Sheet important?
It is clear then why the Balance Sheet must have accurate information. Without it youare running your business with a blindfold on.
Concentrating solely on the Profit and Loss is a mistake which can contribute to a business failing. It also leaves too many questions in your minds. One of the most common questions is - why don’t I have any cash in the bank but I made a profit this month?
Cash flow can be a huge problem for growing businesses. By examining the Balance Sheet you will be able to see how “healthy” the business is. It answers the question “where has my money gone?” and it shows if the business is adequately funded.
Balance Sheet Terminology
1. Assets
Assets are subdivided into current and long-term assets to reflect the ease of liquidating each asset. Cash, for obvious reasons, is considered the most liquid of all assets. Long-term assets, such as real estate or machinery, are less likely to sell overnight or have the capability of being quickly converted into a current asset such as cash.
2. Current Assets
Current assets are any assets that can be easily converted into cash within one calendar year. Examples of current assets would be bankor money market accounts and accounts receivable that are due within one year’s time.
2.1 Bank Accounts and Cash
Money available immediately, such as in bankaccounts, is the most liquid of all short-term assets.
2.2 Accounts Receivable (Trade Receivables)
This is money owed to the business for purchases made by customers
3. Fixed Assets
Fixed assets include land, buildings, machinery, and vehicles that are used in connection with the business.
3.1 Land
Land is considered a fixed asset but, unlike other fixed assets, is not amortized, because land is considered an asset that never wears out.
3.2 Buildings
Buildings are categorized as fixed assets and are amortized over time.
3.3 Office Equipment
This includes office equipment such as copiers, fax machines, printers, and computers used in your business.
3.4 Machinery
This figure represents machines and equipment used in your business to produce your product. Examples of machinery might include lathes, conveyor belts, or a printing press.
3.5 Vehicles
This would include any vehicles used in your business.
3.6 Total Fixed Assets
This is the total dollar value of all fixed assets in your business, less any accumulated depreciation.
4. Total Assets
This figure represents the total dollar value of both the short-term and long-term assets of your business.
5. Liabilities
6. Current Liabilities
This includes all debts and obligations owed by the business to outside creditors, vendors, or banks that are payable within one year.
6.1 Accounts Payable (Trade Payables)
This is comprised of all short-term obligations owed by your business to creditors, suppliers, and other vendors. Accounts payable can include supplies and materials acquired on credit.
6.2Loans
This represents money owed on a short-term collection cycle of one year or less. It may include Commercial operating loans, mortgage obligations, andCapital lease liabilities..
6.3 Payroll Liabilities
This includes source deductions, wsib, and/or group benefitsthat are owed for employees but have not yet been paid.
6.4 GST Liabilities
This includes the sum of G/HST Collected less G/HST Paid
6.5 Inter-Company Loans
This is used if multiple entities are owned by the company and money is loaned or bills paid by another entity.
6.6 Total Current Liabilities
This is the sum total of all current liabilities owed to creditors that must be paid within a one-year time frame.
7. Long Term Liabilities
These are any debts or obligations owed by the business that are due more than one year out from the current date.
7.1Loans
This is the balance of a mortgage or other loan that extends out beyond the current year. For example, you may have paid off three years of a fifteen-year loan, of which the remaining eleven years, not counting the current year, are considered long-term.
8. Equity
The Equity is the total after you subtract your Total Liabilities from the Total Assets. This is the Net Worth of the business i.e. the real value.Equity is made up of the initial and ongoing investment in the business as well as any retained earnings that are reinvested in the business. Using the example above, the figures in the green boxare summarized in the following table:
Credit / DebitTotal Assets / $232,094.64
Less Total Liabilities / $106,127.95
Equity / $125,966.69
9. Owner’s Equity
In the case of a Sole Proprietor this is the Owner’s Capital (i.e. any money you have put into the business) and Owner’s Drawings (any money you have taken out of the business).
9.1 Retained Earnings
This isan accumulated figure of previous year’searnings.
9.2Current Year Earnings
If you look at your Profit and Loss for the same period ending as your Balance Sheet, you will notice that QuickBooks takes the Net Profit on that report and transfers that amount into Current Year Earnings on the Balance Sheet.
The Profit & Loss
TheProfit and Lossshows how much revenue and profit a company has generated over a certain period.
Profit and Loss Year to Date for Month
This report is useful because it gives the monthly figures, the % of sales for each of the accounts and YTD figures also represented as a %. You can see which of your income streams is generating the most income and the % each expense is of the total sales. This will help you identify where your costs are positioned in relation to your sales and if they are excessive.
Example
Profit and Loss Multi Period Spreadsheet
This report is useful because you can see a month by month comparison of the figures over a three month period and includes a total for the quarter.
Profit and Loss (Accrual)
This report can be produced for the following periods:
- January to March (three months)
- January to June (six months)
- January to September (nine months)
- January to December (12 months)
Important
The January to September reporting period is particularly important because after nine months of business, it is possible to forecast the trend for the rest of the year. It is after this month end period has been completed that we recommend you visit your accountant for a review and tax planning.
Other Reports
The Cash Flow Statementdescribesthe inflow and outflow of cash throughout the period. This report is recommended and can be generated from QB.
QB can produce several other reports which may be useful to your specific business. Discuss this with your bookkeeper.
The Business Fitness Review – is recommended for analysis of specific financial KPI’s (key performance indicators).
These, and other reports, are availableon request.
Health Check
Why do a Health Check?
Keeping good bookkeeping records is vital and more information is available on the topic “Records to Keep”in the Housekeeping section of this manual.
/ Outsourcing your bookkeeping makes sense. It enables you to spend time doing the important work of developing your business and ensuring that you are not overwhelmed by “The Bookkeeping Monster”.However, this is your business and you are ultimately responsible for its health. One of the most dangerous things you can do is relinquish this responsibility to your bookkeeper.
You have all heard the old saying of “garbage in/garbage out”. There is no point in analyzing your Balance Sheet if you have inaccurate information in it.
You must be able to answer confidently that the figures are accurate and queries have been answered before generating the reports you need to create strategies to keep your business strong.
Doing a “Health Check” regularly and discussing this information with your bookkeeper, accountant, business coach or mentor is a must.
How often do I need to do a Health Check?
We recommend that a Health Check is done monthly, after the bank reconciliations have been completed and before printing off your monthly reports. At the very least, it should be done quarterly.
The following information is a guide so that you will be able to perform a mini Health Check on your own data files. It is not comprehensive, but it does cover key points to look for.
Important
If you discover a problem during the Health Check, then further investigation is required. There are many ways to correct problems that you may identify during the Health Check. We suggest you discussthe options with your bookkeeper or accountant if you are unsure.
NOTE: When preparing this information, it is assumed that you are able to find your way around QB into the areas we are describing. Refer to your QB Manual or call us if you have any queries.
For the following examples we are using Quickbooks Premier 2013.
How to do a Health Check
Step 1 Confirm Bank Accounts & Credit Cards Reconcile
a)Go to“Reports”from the pull down menus
b)Choose “banking” then “previous reconciliation”
c)Choose the bank or credit card account and the last statement ending date
d)Select “detail” as type of report
e)Select “in this report include…transactions cleared plus any changes….”
f)Click display, click OK to current data message
Repeat this process for all bank accounts and credit cards.
What to look for?
- Ensure there are no old uncleared transactions.
If there are old uncleared transactionsit can indicate that the transaction has been entered twice or the expense was paid from a different bank or credit card account
- Ensure Register Balance agrees to the amount showing on the balance sheet for the same period.
Step 2 – ReconcileTrade Receivables
Print an“A/R Aging(Summary)”Report as of the end of the processing period. This will give you a printout of Aged Receivables as of THAT date.
Example
What to look for?
1.Ensure the total balance agrees with the Accounts Receivable balance as shown on the balance sheet for the same period (or investigate-see below)
2.Reconcile the report with hard copies of the sales invoices, if necessary, to ensure the transactions are “real” and your customers do owe you this money
Problems when thefigures aren’t “real”
- You won’t have accurate information to chase your receivables
- Payments mayhave been allocated against incorrect invoices
- Sales may have been entered twice in error
Problems when there is an “Out of Balance”
If the total on the A/R Aging Summary report does not agree to the Accounts Receivable balance on the Balance Sheet (located in current assets) you do not have an accurate reading of what your customers owe you.
Reasons for an Out of Balance
- Any transactions posted directly to the Accounts Receivable control account (commonly end of year adjusting journal entries from the accountant)
- If a payment applied to an invoice is dated prior tothe invoice itself. This will also happen if a credit note is applied on a date prior to the date of an invoice or the credit note itself
Step 3 – ReconcileTrade Payables
Print the “A/P Aging(Summary)” Report as of the end of the processing period.This will give you a printout of Aged payables as of THAT date.
Example
What to look for?
1.Ensure the total balance agrees with the Accounts Payable balance as shown on the balance sheet for the same period (or investigate-see below)
2.Reconcile the report with hard copies of purchase invoices, if necessary, to ensure the transactions are “real” and you owe you this money to your vendors
Problems when there figures aren’t “real”
- You won’t have accurate information so that you can plan your payments and manage Cash Flow
- Payments mayhave been allocated against incorrect Bills
- Payments may have been processed as “Write Cheques”instead of “Pay Bills”(which deducts it from the QB Bank Account, but does not allocate it against a bill) and creates a duplicate expense/cost which will affect your Profit and Loss
Problems when there is an Out of Balance