Small businesses need to be well informed to survive in a competitive environment, and one of the basic skills they need to develop is reading and understanding important financial statements. Understanding essential financial statements such as “Trial Balance”, “Balance Sheet” and “Income Statement” is critical as they are very important reports for small businesses to ensure their competitiveness in the marketplace.
Running a business without understanding these financial proportions is like driving a car without a dash. Let’s examine each of these financial reports in detail.
Businesses engaged in financial activities need constant information on a variety of parameters such as market demand, market share, price, competitive activity, cost of production, investments, cost of capital, and legal taxes. . Of these, one of the most vital is financial information such as income, costs, equity, wages, loans, and investments. If you take an example of a household, information on items such as the salary earned by the main employee, expenses incurred for family management, school fees and the price of vegetables would be part of the information required on a regular basis and that would constitute financial information. .
One of the methods of collecting and storing financial information is the double entry method in which for each amount of money traded there will be a debit entry to one account and a credit entry to another account. All accounts will have a credit or debit balance.
To ensure that recorded data is performed and stored correctly, accountants use a tool known as trial balance. The trial balance will allow the accountant to prepare information that can then be used to generate important financial statements such as the balance sheet and the income statement (also known as the income statement).
These two statements are considered the most important financial statements for a variety of people interested in any business or organization. For example, it may be an investor who wants to invest in the company. One could be a supplier who wants to provide goods and services. One could be a lender who has lent money to the business and wants to know if the business is doing well enough to repay the loan.
The balance sheet is the financial position of a company on a given day, usually the last day of the financial year (usually March 31 of each year in the case of India). It provides an accurate picture of the business on that particular day in financial terms represented by assets, liabilities, and equity. In the example of the family, the family can take stock of last year and plan to balance the accounts by borrowing if there is a shortage or saving if there is an excess.
The profit and loss account is the financial position of a company during a specific period, usually a financial year encapsulated in the form of profit or loss for the company. Typically, companies run an income statement for a quarter or even a month to help the company evaluate its performance against its objectives. In the example of the family, the family tends to do a profit and loss account each month to coincide with the monthly salary receipt.
Based on the important financial statements of the company, people can make conclusions about the financial health of the company and take steps to interact with that company. Additionally, these statements are among the most important relationships for small businesses to go to market.
What is trial balance
In an accounting system based on the double entry method, all expenses incurred would be recorded as a debit to one account and credited to another account. Likewise, the money received will also receive the same treatment. At the end of the period and all entries made, a trial balance will be prepared. This will be the sum of all the general ledger accounts.
At the end of the period (one year) for which the trial balance is generated, all accounts will show a credit balance or a debit balance based on the number of transactions posted to each account. When balances are listed, it will indicate whether the total of all debts equals the total of all credits. If they don’t match, an investigation could reveal an error and it can be rectified (that’s why it’s called a trial balance). The trial balance will also help track down any arithmetic errors or incorrect entries.