Buchhaltung is the collection and analysis of financial information for businesses and organizations. It includes identifying and recording transactions, preparing financial reports and communicating this information to various users.
Many people associate accounting with numbers and receipts, but it is much more than just that. It requires attention to detail and an ability to think critically.
Financial Statements
Financial statements reveal a snapshot of the business’s assets and liabilities, what it owns and owes at a specific point in time. They include the balance sheet, income statement and cash flow statement, plus a statement of changes in shareholder equity. Combined, the four primary financial reports give managers an understanding of how the business receives and manages money and provides a jumping-off point for internal financial processes like analysis, budgeting and forecasting. The linkage between these reports is simple: after deducting expenses from revenues on the income statement, you arrive at net income on the balance sheet.
Large public companies have well-resourced accounting departments that can manage the complexities involved in producing and publishing these standardized, externally-facing reports. For smaller private businesses, however, financial statement production can be a labor-intensive process. Flexible financial software allows small- and midsize businesses to produce their own financial statements quickly and accurately, reducing the amount of time they spend on manual recordkeeping tasks.
Liabilities
Liabilities are what your business owes to others, like money owed to suppliers or loans owed. Like assets, liabilities are listed on a company’s balance sheet. They are also categorized based on temporality, with current liabilities being financial responsibilities due within a year, and long-term liabilities being those that will be paid back over more than a year.
As a rule of thumb, liabilities should be kept low to preserve the book value of your company. This can be done by generating accurate invoices through accounting software, keeping track of payments owed, and paying attention to your bank accounts. Keep in mind, though, that if your business is running into debt problems, it may be best to seek income tax or accounting advice from an expert.
Assets
Accounting provides a systematic way to record and report the financial information of an organization. Besides enabling managers to evaluate the company’s performance over time, it helps them make better business decisions. These include deciding when to invest in new projects and determining how much risk to take. Classifying assets is a vital aspect of this process.
Essentially, assets are everything a company owns or controls that has monetary value and is expected to provide future benefit. This includes everything from manufacturing equipment to patents and royalties.
Assets are classified based on three criteria – convertibility, physical presence and usage. Convertibility refers to how quickly an asset can be converted into cash, and it is further divided into current assets and fixed assets. Current assets are those that will be used up or converted to cash within a year, and fixed assets are those that will remain in use for more than one year. These are also known as long-term assets.
Owner’s Equity
The owner’s equity is the value of a business’s assets that can be claimed by owners or shareholders. This figure is calculated by subtracting a company’s liabilities from the total value of its assets, the Corporate Finance Institute explains.
Statements of owner’s equity help business managers make decisions about investing resources in future growth and expansion. They can also help a company secure financing from outside investors or banks by providing an accurate picture of its financial health.
A negative owner’s equity may indicate that a company is experiencing significant financial losses and might be in danger of bankruptcy. A positive owner’s equity is an indication that a business is financially sound and is generating income that can cover its expenses and costs. There are several ways that a company can increase its equity, including bringing in new equity partners or increasing retained earnings by increasing profits. However, increasing owner’s equity can take some time to achieve.
