Accounting is critical to meeting tax obligations, but at Copper Ledger we like to think that having accurate and up-to-date accounting records, understanding what the numbers mean, and reviewing them periodically are critical exercises needed to understand the profitability and financial health of any business.
We are most frequently asked by clients how their business is doing. Periodically reviewing financial reporting in detail with an accountant can help business owners understand the metrics to easily answer this question.
Proper accounting is necessary when filing a business tax return, but there are also key events and functions that hinge on having and providing updated accounting records, such as buying a house, applying for a personal or business loan, bringing on additional owners, preparing current year tax projections, and making general business decisions.
Once transactions are recorded, there are two common reports that are derived from the accounting records that are used to prepare financial statements, income tax returns, and general reporting review and analysis. We’ve outlined a summary of each below.
What is an income statement? Profit & Loss
An income statement, or Profit and Loss statement, is a financial statement or report that details the operations of a business over a given reporting period (generally, the current calendar year or comparing a current year to a prior year). It shows business revenue, minus expenses. This is usually a business owner’s favorite report, as it shows the company’s profitability.
Ever wonder where the expression “bottom line” comes from? This is it! Net profit is the total profit for a business, and this is the income that flows through to a personal tax return, which is what taxpayers are ultimately taxed on at the end of each tax year.
What is a Balance Sheet? Assets, Liabilities, and Equity
A balance sheet shows the financial position of a business on a particular date by detailing a list of the company’s assets (what it owns), liabilities (what it owes), and equity (its investment).
Some examples of assets include cash/bank accounts, vehicles, accounts receivable and inventory. Examples of liabilities include loans, credit cards/debts, and short-term liabilities such as payroll tax payables.
Be sure to have all assets (i.e. bank accounts) under the business name if it is an asset of the business. Likewise, any liabilities (credit cards, loans) – if for the business – should be under the business name and reflected in the business accounting.
Equity accounts represent a company’s net worth, and an owner’s basis is increased by items of income and gain and by capital contributions. It is decreased by items of loss and deduction, draws/distributions and nondeductible expenses. Equity accounts can be viewed by running a Balance Sheet report. An owner’s basis cannot be reduced below zero.\
Our team at Copper Ledger works with small business owners to navigate the intertwined relationship between business and personal financial matters, since small business owners often find it challenging to separate the two. There are also times when the business uses cash or personal funds to make business-related purchases (and vice versa). It is important to establish both a process and an Accountable Plan for capturing the details of these transactions.
Having accurate and updated financial statements allows a company, and ultimately the owner, to meet compliance requirements, understand business profitability and operations, and provide its tax accountant (us!) with necessary data for projecting the current year tax liability. In addition to providing necessary services and reports, our accounting team makes sure our business owners are capturing every deduction, feel confident in their numbers, and are not raising any audit red flags with the numbers that flow through to the tax return.
You worked hard to start your small business. Let us do your small business accounting so you can focus on growing the bottom line (and tax planning for when it does!). Learn more about our services and how we can help here or visit us online at copperledger.com.