Accounting Review

Overview of Accounting Paper

MBA/503 Introduction to Finance and Accounting

Accounting and finance are topics we tend to leave to the “professionals”. They are daunting and elusive terms to the small business owner and they might even conjure up a little fear. Today we can change all that, it is important to know every facet of your business to achieve success. We will begin to explore the financial world of business and learn how to take financial control of our businesses. We will look at very basic, comprehensible techniques that are easy to learn and apply to our everyday business functions. By learning these techniques we will be miles ahead of the competition and truly learn how to run our business financially, ultimately yielding much anticipated success.

The purpose of this presentation will be to define and understand the basics of accounting, determine the best business structure for your type of business, and the importance of creating a financial plan. In exploring these essential topics you will be able to find key financial indicators that help tell the story of your business.

First, we will look at understanding the basics of finance. There are 3 basic financial reports used when looking at any companies past and/or current standings. These are the balance sheet, the income statement, and the cash flow statements.

The balance sheet is a system of transactions which show what money comes in and what money goes out of a particular business. It is basically the checks and balances of that business in which the transactions should "balance out" over a certain period.

The income statement relates because it shows a snap-shot of only the transactions that contribute to the earnings or the profit that an organization generates. It is very useful because it can show us very quickly if our company is in profit status or not. The cash flow statement tells us how much cash you have on hand after all costs are met. An example would be like your personal bank account statements. It shows how much cash you started with, how much cash you paid out and what was deposited. The most important identifier is how much cash is left over at the end and hopefully you can show a positive cash flow during this period. These 3 financial statements tell a story of your business and tie it all together. If we look at our personal finances, many of us use these simple techniques but may not use such a formal system of terms and/or format.

Example balance sheet and cash flow statement:

Sample Small Business Balance Sheet[9]

Assets Liabilities and Owners' Equity

Cash $ 16,600 Liabilities

Accounts Receivable 1,200 Notes Payable $30,000

Land 52,000 Accounts Payable 7,000

Building 36,000 Total liabilities $37,000

Tools and equipment 12,000 Owners' equity

Capital Stock $ 80,000

Retained Earnings 800

Total owners' equity $80,800

Total $117,800 Total $117,800

Statement of Cash Flow - Simple Example

for the period 12/31/2005 to 12/31/2006

Cash flow from operations $4,000

Cash flow from investing $(1,000)

Cash flow from financing $(2,000)

Net increase (decrease) in cash $1,000

Secondly, let’s discuss the structure of your business. This is perhaps one of the most important characteristics of your business because it determines how you will be paid, taxed and what liabilities can do to your personal assets if there is ever a problem. For example, lets say you have a sole proprietorship for a lawn cutting business you started a number of years ago. At first it was you (as the owner) and your brother out there cutting lawns, doing all the work yourselves but also taking all the risks alone. You