The availability of capital is the primary factor to think about while starting a business. To get started, a trading business must have access to either large capital or long-term loans.
Somewhere has to be found to keep the goods and make sure they’re secure. It’s important to plan for transportation (for delivering goods), communication (through phone and email), and bookkeeping (for keeping track of money and credit transactions).
A small financial cushion is also necessary to support the company’s founders as they lay the groundwork for their enterprise.
This article provides an introduction to the statement of financial position (often known as a balance sheet), a fundamental document in introductory accounting.
Definition of the Financial Statement
A financial position statement is a historical record that only takes into account completed transactions. Typically, a 12-month accounting term is utilized for this purpose.
Management, owners, employees, lenders, and others use financial statements for many purposes.
Let’s pretend you’ve come into $5,000 in inheritance. You settle on using the money to launch a home-based enterprise. Starting on June 1st, the aforementioned $5,000 will be earmarked for your new enterprise and will be considered its only asset and property.
This opening balance sheet is the company’s official recognition that it owes you, the owner and proprietor, money.
Income Statement as of June 1st, 2017
Transactions are the day-to-day business activities of a local retailer. The following are typical components of such deals:
Buying and selling goods for immediate payment and/or deferred payment.
Accounts for purchased items and services are closed out.
In rare cases, a company will make a permanent investment in what are known as non-current assets (or “fixed assets”).
Several transactions occur during the first week of June, and in this case a second balance sheet has been created solely to highlight the two ways in which each transaction affects this financial statement.
The listing and categorization of assets and liabilities on a balance sheet would typically be done in greater detail at the end of the trading session, once a year at most.
On the 2nd of June, you pay $1,300 for secure shelving and storage cabinets.
Note that these basic balance sheets have a straightforward arithmetic explanation for each of their four steps.
Financial Statements as of June 2 and June 3: You buy $2,000 worth of items on credit from Wholesalers Ltd and agree to pay for them at the end of the month.
Financial Statement as of June 3 and June 4: You make a $600 profit off a cash buyer and a $400 profit off a buyer who pays you at the end of the month on credit.
Assuming a 20% markup on sales, your cost to produce the final product is $800.
Income Statement and Balance Sheet as of June 4, 2017 and June 5, 2017 You withdraw $250 cash for your own personal use and pay $500 off the account with your supplier for the goods purchased on June 3.
Financial Position Statement as of June 5
Take note of how the small business proprietor’s capital account stays the same until:
Gains or losses in business
The owner makes withdrawals
Naturally, if the owner puts in more of their own money, the capital account will grow.
This brief balance sheet discussion has covered some basic accounting principles. The principle of total assets being equal to total liabilities (including capital) is emphasized throughout.
That is to say, the accounting equation, namely A = C + L, is true in any circumstance, where:
The company’s total assets, denoted by A, are:
To illustrate, let’s say that
L is the company’s total external debts and liabilities.
The Breaking Point
The accounting equation is reflected in the statement of financial position, so keep that in mind. Since the accounting equation can be written in multiple ways, the balance sheet can also take on a variety of formats.
When dealing with varying financial reports, keep this in mind and some degree of adaptability.