Three Sets of Financial Statements


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You may have heard about the three financial statements: Balance Sheet, Income Statement and Statement of Cash Flows. That’s not what I’m talking about here, but let’s go over this really quickly.

The Balance Sheet is like a snapshot of your assets, liabilities and equity as of a certain date. Assets are things you own such as your bank account, inventory, accounts receivable and other items that have a value. Liabilities are amounts you owe. It includes your accounts payable, mortgages, notes payable and credit cards payable. Equity is what is left.

Your Income Statement shows income and expenses for a specific period. It could be for the month of October, for example, and show the income and expenses for October 1 through the end of the month. Or it could be year-to-date through the end of October.

The Statement of Cash Flows starts with the net income and makes non-cash adjustments to reconcile to the actual cash. In some ways, this is the most important statement you have because it will show where cash is coming from and going to. If your Operations are consuming cash, that’s a warning sign and this is the statement that will tell you.

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But that’s not what I’m talking about when I talk about three sets of books.

  1. Accrual-basis. This means you will record income when you have earned it, not when you receive it. It also means you will record expenses when you owe them, not when you pay them. It’s a more accurate representation of your income.
  2. Cash-basis. This is most likely how you will report your income and expenses for your tax return. The good news is that you can get both accrual-basis and cash-basis statements from one set of QuickBooks, if you’ve set up the systems and are making entries correctly.
  3. Real Operation & Owner’s Perks. Face it, part of the beauty of ownership is the perks. But if you hired all outside people, the perks might be a lot less. Keep track of those benefit items that aren’t necessary to the operation of the company separately in your books.

In effect, you have three sets of books. But if you set the records up correctly, it won’t be any harder to produce the three sets then it would with one.

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This is where the real business owners get separated from those who are happy to stay small. Or rather, they are happy to keep their income small.

In order for your business to grow, you must grow.

That means picking up new skills and new advisors. We can help! Drop us a note at Cash Flow Accounting or give Richard a call at 888-592-4769 to find out how affordable our bookkeeping and new virtual CFO services can be.



One Comment

  1. Tim says:

    Hi, I had asked this question earlier when the post was new but the reply seems to have gone away. What are some ways, or recommendations on how to record #3 real operations and owners perks? It seems like of they are separated on a QBs file they may look like red flags.
    Thanks,
    Tim

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