Startup Accounting Basics: The 4 Fundamental Documents

The 4 Fundamental Documents

Part 3 of a 10 Part Series

Accounting for Small Business 101

This 10 part guide will provide you with the most basic fundamentals of accounting for your business. Whether you’re a budding entrepreneur with your first start-up or a stay-at-home mom selling knit hats on Instagram, lay the groundwork. Here’s how.

Part 3: The 4 Fundamental Accounting Documents

You have a basic understanding of what accounting is and who to hire to do your accounting. Now let’s get down to the nitty gritty of accounting. Think of this as an “accounting translation handbook”. These are the four important documents that are the keys to understanding your startup’s financial health.

Income Statement

This is a term we’re likely the most familiar with. It’s also well-known as a Profit and loss (P&L) statement. You may imagine a paper with a green line graph shooting upwards, meaning your business is a success and you’re making big bucks! In reality it’s a bit more detailed than that. The numbers will show how profitable your business is. The literal bottom line on this document is your net income. This is calculated based on your sales revenue, cost of goods sold, gross profit, expenses, overhead, and taxes. An income sheet shows data from a range of time: a year, a quarter, or year-to-date.

Balance Sheet

A balance sheet is a document that shows a snapshot of your business’s financial “vitals”. When you visit your doctor they always take the same stats. Your weight, blood pressure, and heart rate are key indicators of your current health. On a Balance Sheet, your current assets, liabilities, and shareholder’s equity shows you the financial position of your company.

Cash Flow Statement

This document is like a map of the different routes your money is taking. And when we say “cash” we’re not talking about the cold, hard paper stuff. In accounting terms cash means “money in banking accounts, checks or any other form of currency that is easily accessible and can be quickly turned into physical cash.” (from Investopedia). So this statement shows how your money is moving, and will show the start and end balance for a given period of time.

Bank Reconciliation

On a regular basis your bookkeeper or accountant should run a bank reconciliation. It’s normal and expected that your bookkeeping software will show a different balance than your bank account. This could be from checks that haven’t cleared, pending charges, and bank service fees. A bank reconciliation statement shows the differences and adjustments made. This thorough check helps you detect fraud, remove mistakes from user error, and gives auditors the information they need for their year-end auditing.

These are the four most important and most common documents and reports that you’ll be seeing from your accountant. You may even be running these reports yourself if you are an ambitious startup owner. You can DIY these reports quite easily through Quickbooks or other even with a spreadsheet template. And you may quickly see evidence of your success, or perhaps some struggles. An accountant will be able to tell you why you are succeeding or failing based on these reports.

Pioneer Accounting Group can generate and review reports for you. Gauging your strengths. Gently exposing your weaknesses. And all in a way you can understand and benefit from. Don’t hesitate to start a live chat or contact us to see if we’re a good fit for you.