Financial reporting is your main source of information to understand the financial health of your business. A healthy financial can guarantee your business will keep on growing in the future. Otherwise, you need to evaluate your business performance.
Financial reporting also a form of responsibility of the company owner or management to the investors, government, and many others. That’s why your financial reports should be highly accurate.
To achieve the highest accuracy, your financial reporting needs to have its main components. Here are four of them:
The income statement is the most important component in your financial reporting. This component presents a detailed breakdown of your company’s profit (or loss) in a certain period. There are two subsections in the income statement.
The first is the one that shows the gross profit (or loss). To get this number, you can subtract the total income with the cost of goods sold. The cost of goods sold is the opening stock plus net purchases minus the closing stock.
The second subsection in the income statement is the net profit (or loss) of your company. The amount of net profit/loss can be generated from subtracting the gross profit/loss with the operational costs, such as salaries, taxes, rents, and many others.
Related article: 4 Types of Financial Statements Every Business Owner Should Know
The balance sheet is the part of financial reporting that portrays the ability of your company to honor your debt and obligations compared to the company’s total assets.
You can start by recording non-current assets such as computers/laptops, machines, and office furniture. Thereafter, current assets also have to be recorded. Current assets such as inventory, accounts receivable and cash.
Non-current liabilities such as debt financing and current liabilities such as trade payables and bank overdrafts also needs to be recorded. In essence, the balance sheet summarizes your company’s equity position in a certain period.
The next component of financial reporting is cash flows. It summarizes your company’s inward and outward cash movements. The inflows and outflows of money can be generated from operations, investments and financing activities.
Cash flows generated from operations focus on day-to-day activities in your company. Sales and inventory purchasing categorized as the company’s operation. Investments related to the incomes and expenses generated from long-term programs of projects. While financing is the cash flow related to the sale of shares and distributions of dividends.
Changes in equity
The last component of financial reporting is the changes in equity. The component reports the amount and sources of equity changes. Any changes during a certain period can be monitored from the increase or decrease of the beginning balance compared to the ending balance.
This component initially reports the equity compositions which keeps changing from time to time.
Related article: Year-End Accounting Tips for Healthy Business Finances
Creating a financial report is not an easy job if you still do it manually. But, with the help of accounting software, the process can be done swiftly and easily.
Accounting software also minimalizes the error during data input or calculation. This advanced technology can help you create a better and more accurate financial report.