Overview of Accounting

In the business world it is fundamental for all business owners to understand the functions of accounting and finance as it relates to his business. For the small business owner accounting and finance is just as important to his day-to-day operations as it is to the CEO of a multi-million dollar corporation. Accounting and finance are the foundation to and the road map of the company’s future. Without accounting and finance the business owner does not know where the company has been financially and will find it difficult to plan accurately for the future.

The purpose of accounting is to document the operations of the company. Accounting reflects the company’s financial history thus; making accounting documents an essential tool in preparing for the company’s future. The purpose of finance is to provide a plan for the future. The small business owner should use his finance knowledge in combination with his accounting documents to assist him in accurately forecasting the company’s financial future. (McNamara)

In addition to accounting and finance knowledge, small business owners’ should be able to generate financial statements from his accounting documents and analyze those statements to fully understand the current and future financial state of the business. The four main financial statements are balance sheets, income statements, cash flow statements, and statements of shareholders’ equity. (na, Beginners’)

The balance sheet reflects the company’s assets and liabilities at a specific point in time. An income statement reflects how much money the company made as well as spent over a period of time. Cash flow statements show the exchange of assets between the company and other entities over a period of time. A statement of shareholders’ equity illustrates the changes in the interests of the company’s shareholders over a period of time. (na, Beginners’)

Managerial reports are equally as important as financial statements. Managerial reports provide for the company’s overall strategic decision-making ability. They will enable the small business owner to plan for the company’s future with confidence. Subsequently, the quality of managerial reports is critical. The managerial reports should outline the fiscal position of the company and refer to the company’s financial statements to support the company’s position. Well-organized financial and managerial reports should provide a clear picture of the company’s performance, making it easier for the small business owner as well as anyone who has a vested interest in the company, to interpret the financial results on his own. (McNamara)

Even more critical then the creation of, is the use of financial and managerial reports. It is imperative that the small business owner distributed these reports to others within the company who understand how to interpret them, have the authority to make operational decisions, and will review them promptly so as to implement any needed modifications in a timely manner. (McNamara)

Financial accounting is also used to make informed and ethical business decisions. For instance, should the accounting documents show the available capital for growth, the small business owner may decide that it is a good time to invest in company growth by allocating resources efficiently, maximizing the income potential of the business, and monitoring the results through the accounting documents. The successful management of the company’s financial resources is dependent on the integrity of the financial accounting, so it is important that the small business owner take time to