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Financial Management and Financial Statements

Simple Alliance, Kenya Limited


Key Financial Reports

Financial management requires you to prepare certain financial reports. Financial accounting skills are required for these tasks. Some common financial statements you may come across include:

  • Balance sheet
  • Profit and loss or income statement

Balance Sheet

The fiscal status of your business at a particular point in time is represented by the balance sheet. This financial document details your business’ fiscal resources. It also gives a summary of the liabilities that are associated with your assets. Your assets less your liabilities give the owner’s equity figure.     

Liabilities + Owner’s Equity = Assets

The Key Aspects of Your Balance Sheet

The balance sheet has major components such as:

  • Liabilities
  • Assets
  • Owner’s equity
Liabilities

These represent claims against your business by your creditors. Essentially, liabilities are financial obligations to pay reasonably certain or definite amounts of money at some future date.  Liabilities fall into two major categories:

  • Long-term
  • Current
Long-Term Liabilities

These are business debts that are due one year after the date of your balance sheet.

Current Liabilities

These debts are due within the year of your financial report. Normally, your current assets settle current liabilities.

Liability Items

Some common liability items include:

  • Income taxes payable 
  • Notes payable
  • Depreciation
  • Accounts payable

Income Taxes Payable

These are the income taxes you owe the government. 

Depreciation

This is the reduction in fixed assets’ (excluding land) useful value owing to several factors, including:

  • Age
  • Normal wear and tear
  • Obsolescence after new technologies set in

Notes Payable

This is money your business may owe to a financial institution. Usually, you issue a promissory note before receiving the cash.  

Accounts Payable

These are the monies your business owes its everyday customers after receiving services or goods in credit.

Assets

Assets are the financial resources of your business. They include items like:

  • Equipment
  • Buildings
  • Land
  • Accounts receivable
  • Bank deposits
  • Patents
  • Motor vehicles
Owner’s Equity

This is your residual interest as an owner of your business.

Income or Profit and Loss Statement

This document shows your business’ financial results for a specific time period, for example, a year. It matches the costs incurred in production of services or goods with the monies generated from the sale of the same wares. The income statement thus shows the level of loss or profit for your business.   

Key Elements

Your profit and loss statement comprises aspects such as:

  • Interest revenue
  • Income tax provisions
  • Interest cost 
  • Operating profit
  • Operating expenses and cost of goods sold
  • Net sales
Income Tax Provisions

This is the amount of income tax you expect to pay.

Net Sales

This is the cash you obtain from selling your services or goods. It factors in discount amounts and cost of retuned goods.

Cost of Goods Sold Operating Expenses

These are the entire expenses incurred to generate finished goods from raw materials. They include depreciation provisions.

Operating Profit

This is your Net Sales minus all Operating Expenses.

Interest Expense

This is the interest you pay to your creditors

Interest Income

This represents additional revenue sources derived from investments. 

Financial management is a crucial business skill. These skills help you to prepare a number of financial reports. This role needs some financial accounting knowledge. Financial statements help you to effectively operate your business. Some major statements include the balance sheet and the profit and loss statement otherwise called the income statement. The major elements of an income statement include: Interest revenue, income tax provisions, Interest cost, Operating profit, Operating expenses and cost of goods sold, and net sales. The major components of your balance sheet include: Liabilities, assets, and owner’s equity.

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