Running a business in an efficient manner includes understanding important terms that will enable the company to maintain its financial stability. While most firms have an accountant to assist in bookkeeping, there are still basic terms that need to be familiarised. Besides knowing the different accounting terms, you should also understand how it is used in regular business practice.
These terms are usually used and applied in the early stages of business development when new owners begin their venture into entrepreneurship. Read on to find out more on some of the accounting terms that are essential to business owners!
What is a Financial Statement
Financial statements usually provide an overview of the business details including:
1. Statement of Financial Position (SFP)
Another term for the SFP is called the balance sheet. This is designed to reflect the value of a company or organisation. The balance sheet details the company’s assets, liabilities, as well as the owners’ equity (net worth) as of a particular date.
NOTE: A balance sheet is generally prepared and distributed on a monthly or quarterly basis, with its frequency of reporting being determined by the company policy or by law.
A balance sheet is split into two portions and ensures both sides are equal, with this main formula:
In other words, the company’s assets, or the means to operate the business, are balanced by the business’s financial obligations and equity investment brought into the business and its retained earnings.
2. Statement of Comprehensive Income (SCI)
This is also known as Profit & Loss statements. They reflect the company’s revenue for the year based on
The amount of sales they made
The amount of expenses incurred
After all amount has been consolidated, profit or loss is determined by the formula:
Revenue – Cost of Sales = Gross Profit
Gross Profit – Expenses = Profit / Loss
3. Statement of Cash Flows (SCF)
This report shows the detailed information on how and where the cash of a business is being used. There can be different types of cash flow used to run the daily operation depending on the nature of the business.
Financial statements act as a communication data as it is shared throughout the whole business and are being reviewed to provide financial decisions and analysis by the accounting department for the business.
These documents will then be summarised into the financial statement and presented to the business owners to aid the upper management to make important decisions for the business and control assets.
What are the Key Terms Found in Financial Statements
The terms listed below are some of the most common terms being mentioned and used while preparing and analysing the different financial statements.
Assets are items that your company owns, consisting of financial assets, current assets, fixed assets and intangible assets.
Financial asset includes:
Fixed assets include:
Plants & equipment
Intangible assets are identifiable non-monetary assets without physical substance which includes computer software, licenses, and patents etc.
Liabilities are items that your company owes to the other party, consisting of long-term and short-term liabilities. Liabilities are usually recorded as follows:
Long-term liabilities include bank loans that are not repayable within a year
Short-term liabilities include trade payables, rental, loans repayable within a year, accrued expenses etc.
Equity are assets ‘left over’ after being deducted from the company’s debts has been paid off.
For example; A business owner purchased a machine for $50,000 and is left with a bank loan of $10,000. This means that the owner’s equity is $40,000.
TIP: Did you know that in the balance sheet, the formula Assets = Liability + Owner’s Equity can be easily memorized by the acronym (A=L+OE which also has the meaning of ALOE VERA)
4. Income & Expenses
Income and expenses are reflected on the Profit & Loss statement of a business over a period of time. For most businesses, the source of income is derived from the sales of goods and services as well as other additional income such as:
Gains from sales of non-current assets
They are to be disclosed separately under ‘other income’ in the P&L statement. On the other hand, expenses are cost a business have to incur to generate income for the company. These include:
Cost of goods sold
Interest expense or loss from sales of non-current assets
5. Cash Flows
Cash flows refers to the movement of the money flowing in and out of the business and are categorised into 3 different types namely:
Operating cash flow: Includes all cash activities relating to net income such as cash generated from sales (income) or cash paid for merchandise (expense)
Investing cash flow: Includes all cash activities relating to non-current assets such as long-term investments, property, plant, equipment
Financing cash flow: Include all case activities related to non-current liabilities and owners’ equity such as stock sales, dividend payments and principal amount of long-term debts
How to Prepare Your Company’s Financial Statements
The purpose of annual returns is to give any potential partners, creditors, or investors a clear view of how profitable the business is at the moment, and it also allows them to make informative decisions, planning and budgeting for the business’s future financial years.
According to the Financial Reporting Standards of Singapore (FRS), a complete set of financial statements consists of:
Statement of financial position as at the end of the period.
Statement of profit or loss and other comprehensive income for the period.
Statement of changes in equity for the period.
Statement of cash flows for the period.
Addition notes, comprising significant accounting policies and other explanatory information.
All statements should consist of at least 2 financial year’s information covering last year and current year’s data this way, readers can learn about the profitability/loss the company has incurred.
Although ACRA does not prescribe who is to file or prepare the financial statements, it is the prerogative of the directors to ensure the quality of the financial statements and that they are not erroneous.
Which formats are businesses required to file their financial statements in?Dylan2021-09-22T11:52:17+08:00
Both public and private companies (limited or unlimited by shares), except EPCs, are required to file the full set of financial statements mentioned above. This should be done in the eXtensible Business Reporting Language (XBRL) format.
How often must auditing of financial statements be done?Dylan2021-09-22T11:51:09+08:00
Before the financial statements are filed with ACRA, the directors must ensure that the financial statements are duly audited within 14 days before being sent to the shareholders at the AGM, with the auditor’s report attached to the financial statements.