The original books of entry if maintained accurately form a basis on which financial statements – the statement of income, statement of financial position, statement of cash flow – are prepared. The statement of income summarizes all the income and expenses for the period. The income is compared with the expenses and the net is either the profit or loss for the period. The statement of financial position shows the assets, liabilities and equity – what the business owners, what it owes and the owners interest in the business. The statement of cash flow shows how the business has generated or used cash in sales and expenses for the period that is being looked at. Fortunately, there are many software that can be used to keep a record of all the business undertakings which is a subject for another day.
Before obtaining the summaries necessary for the preparation of the statements, there are many activities that are carried out on a day-to-day basis. For instance, when a sale is concluded an order may have been received and fulfilled. Order documents from clients should be recorded and executed through approval by a responsible official. The issue of the goods should be ideally handled by an independent person from the one who received the order papers. After this, invoices and delivery notes are prepared by an accounting officer and passed on if possible to another accounting officer for input into the accounting system. Similarly, all purchases and expenses are first approved and authorized before the orders to the suppliers are sent or made. Once the bills from suppliers or cash receipts for expenses are received, they are entered into the system.
For assets and liabilities, recognition of transactions is carried out in a similar way. Owners equity in most cases is the original amount introduced into the business by the owners and is increased or reduced by profit or loss for the period. The emergence of all the activities during a given period is that a set of records in form of Sales ledger, purchases ledger and general ledger is created. Totals in each item heading in the ledgers are used in the preparation of the statements that are relied upon to gauge the business performance.
It is essential that business owners implement systems that will make sure that all that happens in the business is captured and recorded accurately. It is only then that the owners are able to have an accurate picture of how their business is performing and make the necessary changes if they find that the business is not performing well to their expectations.