Basic Rules for Financials

Before we launch into a discussion of the nuances of financial statements, you need to accept the fact that there are rules to putting these statements together. How much you need to worry about the rules, however, depends on what you want to do with the statements. If you are intending to show them to third parties such as lenders, creditors, or investors, you need to be more careful than if they are intended for your eyes only.

Finance is just as much a sport as football. The rules of the finance game are called the generally accepted accounting principles (GAAP) and are set forth by the American Institute of Certified Public Accountants (AICPA) and the Financial Accounting Standards Board (FASB). GAAP includes numerous guidelines and conventions that help insure that reported financial information is accurate, objective, and reasonably consistent for all types of business, so that results from one business can be compared to those from another.

Most likely, your financial statements will be prepared by your accountant, who will follow the GAAP rules when creating them. Some investors or banks require that financial statements be prepared by a CPA because this gives the lender an extra measure of security CPAs have proven that they have extensive knowledge of accounting, tax, and legal requirements by passing a difficult professional examination, and must build up their knowledge with continuing education. What's more, CPAs must adhere to certain professional ethics requirements or risk losing their licenses.

Even if you're not required to use a CPA by your bank, you may decide to have a CPA prepare your statements, particularly if you're planning to seek financing or investors in the near future. However, you can also opt to have a non-CPA accountant prepare your statements, or even to prepare your own financial statements. A number of software products are available that incorporate GAAP and make this job relatively simple, provided you understand the basic concepts we're about to explain to you.

Business Tools

A trial balance spreadsheet can be found in the Business Tools area. It is an Excel 4.0 spreadsheet template, so you can use the template as a starting point for your own trial balance.

Another Business Tool is a sample balance sheet. It is an Excel 4.0 spreadsheet template, so you can use the template over again; you need to download it only once. Finally, you may also download a sample income statement. It is also an Excel 4.0 spreadsheet template, so you can use the template more than once.

How often should you compile financial statements? Unless your bank needs to see them more frequently, many businesses request that the statements be prepared by their accountant every quarter. Some smaller businesses find that once a year (around tax time) is enough. However, if you have financial software at your fingertips, you may find it so easy to draw up provisional statements yourself that you do it monthly, or whenever you feel the need to get precise information on how your business is doing.