The financial statements tell us about the financial position of the company or business. The stakeholders of a business mainly use the financial statements to get an idea about the financial performance of the company. The key stakeholders of a business are: shareholders & creditors, customers, employees, suppliers, state and the community.
The major financial statements prepared by a business are: profit & loss account, balance sheet, cash flow statement and statement of changes in equity. Financial statements are prepared according to Generally Accepted Accounting Principles (GAAP). One reason why financial statements are prepared according to a common set of accounting standards is to enable comparison of financial performance of two different businesses or companies. If financial statements are not prepared according to a common set of accounting standards then it will become difficult for end users to understand them. International Financial Reporting Standards (IFRS) are now being used by major international corporations to prepare their financial statements. It is mandatory for listed public limited companies to come out with their financial statements at the end of every financial quarter. A listed public limited company is one that has raised money from the public and is listed on a stock exchange.
The profit & loss statement (also known as income statement) gives the financial performance of a company in a given financial period. It gives the revenues, costs and profit (or loss) of a company in the period. The profit & loss statement begins with the amount of revenue or sales of the company during the period. Below the sales are costs of goods or services produced by the company.
The costs of goods and services are deducted from revenue to get the gross profit in the period. The operating expenses are deducted from the gross profit to get the operating profit of the company. Operating expenses include selling expenses, general & administrative expenses and depreciation. Other income is added to operating profit to get the profit before interest and taxes. The interest expense is deducted to get the profit before tax. Tax expenses are deducted to get profit after tax.
Many small and medium sized businesses – especially those based in smaller towns andcities – still do not use modern accounting system software. They still stick to the old, manualpaper-based accounting system. These businesses are not realizing that accounting software notonly does the accounting work more efficiently but may actually improve business performance.
Contemporary accounting system software has many analytical capabilities. These analytical capabilities enable this software to make more accurate demand forecasts. Moreaccurate demand forecasts mean that a business can plan utilization of its resources moreefficiently. It can raise the resources required for meeting the forecasted demand beforehand andat lower costs. It can avoid situations of shortage and customer dissatisfaction.The company can analyze large amount of data of past years using a more sophisticatedaccounting system. This is not possible in case of manual accounting process.
The analysis oflarge amount of data of past years enables the business to get information and insight on itsperformance over the years. Which of its products have been making consistently highcontribution to its revenues and which of them have been making less contribution? In whatproportion its costs have grown in correspondence to growth in revenues? Which are the areaswhere costs can be controlled? These are some questions whose answers can be gotten by the useof accounting software.
Almost every large business today uses accounting system software. This system alsoreduces the probability of accounting errors. If the inputs in the system are accurate, the systemgives accurate results. Accurate accounting information coupled with continuous analysis offinancial data helps a business achieve continuous improvement in performance. This continuousperformance is then reflected in the form of higher sales and higher profitability.
Many small businesses hesitate in incurring the costs required for buying and implementing accounting system software. These businesses should treat the cost of installing accounting system software as an investment. This investment can be easily recovered by the increase in profitability that a business is able to achieve due to better performance because of better analysis of accounting data and information.
It is easy for employees, working in the accounts department, to learn to operate accounting system software. There are many training consultancies in India that provide accounting system software training to individuals and employees at very reasonable and affordable costs. Knowledge of operating accounting software is quite a valuable skill nowadays.