Many business owners wear many hats and they are so into running their business that the last thing on their mind is taking care of the books. Be ready at tax time and pay less taxes.
WHY DO YOU NEED A GENERAL LEDGER?
"Keeping books" is a phrase that refers to maintaining a general ledger. Now, what is a general ledger and do you need one?
Traditionally, bookkeepers recorded day to day transactions in a ledger by hand, using the double-entry system.
Now, with the advent of computers, these transactions have become much simpler. No more manual entry, you could use excel sheets and accounting softwares. While the way we record transactions has changed, the importance of the general ledger remains for creating financial reports which are crucial for evaluating business health.
The general ledger is the foundation of a company and is a master accounting document providing a complete record of all the business assets, Liabilities, equity, revenue, and expenses.
every time a financial transaction is made, it updates 2 or more of these accounts. This is referred to as double-entry accounting.
Difference between Net Income and Cash Flow
A client of mine viewed her income statement and asked the question. "Why do I have less in my bank account when my net income on my income statement is more?"
I new exactly what she meant and gave my best explanation.
" Net income is the result of all the revenue for a certain time period (ex: Jan to Mar, 3 month of business activities) less all the expenses for that same time period."
"Cash flow is all money going in and out of bank account. it could have owners withdrawals and or owners contribution which do not affect the income statement. As well as loan amounts coming out of the bank account, the principle will affect the loan balance and the interest portion will land on the income statement as Loan Interest.
So you might have $1500. coming out of the bank account but only $700. of that will be on the income statement as Loan Interest."
By reviewing the bank statement each month, you will be able to pick out transactions that do not affect the income statement or profit and loss statement.
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