To answer questions such as: How much did your business lose or win last month? What are the assets of your company?
Or can you pay salaries next month? It is necessary to organize the accounting of your business. Accounting is a technique that establishes the rules and procedures to register, quantify, analyze and interpret the economic facts that affect the assets of any organization, providing useful, reliable, timely and accurate information, whose purpose is to achieve financial control, evaluation of the entity and support decision making.
- Technique: Set of procedures that can be learned.
- It establishes norms and procedures: It must be done following some instructions that are of universal use, so that it is interpretable by all and comparable between one organization and another.
- Registers, quantifies, analyzes and interprets the economic facts that affect the patrimony: Identifies an action that affects the assets of a business, translates them into money and registers them to allow analyzing the history.
- Financial control: If you know what happens, you can make sound decisions.
- Evaluation of the entity: The records that comply with all the above, provide an accurate radiography of the reality of the business, which is essential to interact with banks and other entities.
- Support decision making: With the control and evaluation that allows to implement this record, decisions are not left to chance or are not based on intuition.
Accounting has 3 main tools for keeping records in order:
1.- Cash flow
It is a state that represents the movement of money of a company during a certain period. It is composed of the initial balance, plus the income in one period (sales, credits, capital contributions, etc.) and less the outflows of money from that same period (expenses and investments).
It is recommended to keep the cash flow on a daily basis. The final box of one month (or one day, if it is made daily) is the initial box of the following month (or the next day).
It is also very useful to draw up a projected cash flow to see if we will have enough money to pay all the costs of our company throughout the year. To do this, you need to have a sales and expenses projection.
2.- The income statement
The income statement is the final result after adding up everything the company sold and subtracting all the expenses incurred in generating those sales. When the result is positive, there is a utility. When it is negative, there is a loss.
It is important to note the difference between the result and the box. The cash is the money that the company has, a cash flow is how the cash comes in and out of the cash. The income statement shows the income and expenses of the business, which do not always match the cash.
For example, if a printer is sold to a customer, and he pays 50% of the value of the printer with a check per day and with a check to date for the next month the remaining 50%, the box will only show the entry of the printer. 50% of the sale value of the printer, but the Income Statement will reflect the sale of the product by 100% and the recognition of the accounting cost of the printer.
3.- The balance
In accounting, the balance is the state that reflects the situation of an entity’s equity at an established time. It is a photo of the company at a certain date, for example on December 31, 2012.
The balance is structured through three concepts:
- Active: They are the resources that a company has. For example: money in cash, accounts receivable, machinery, property, etc.
- Passive: Shows all the acquired obligations that contribute to the operation of the business. For example: Accounts payable, bank loans, long-term debt, etc.
- Equity: It is the difference of the Asset less the Liability and represents the contributions of the owners or shareholders plus the undistributed results. If we add all the assets and we subtract what we owe to third parties, the difference that remains is the equity, that is, the contribution of the owners.
In every company at all times it is given that their assets are equal to their liabilities plus their assets, hence the name balance.