From transaction analysis discussed in the previous blog, Introduction to Accounting: Part III, let's move to financial statements.  A financial statement is a record of financial activities of a business which is presented in a structured form for easy understanding. There are four (4) major financial statements:

  1. Income Statement or Profit & Loss Statement
  2. Balance Sheet
  3. Statement of Changes in Equity
  4. Statement of Cash Flow

The Income Statement (Profit & Loss Statement), as the name implies, explains the company’s Revenues earned and Expenses incurred in a business, in a certain period to time (e.g. Jan1 – Dec 31), which results in a Profit or Loss.

Updated December 2014.

As most of businesses are closing their books in December, this checklist is updated accordingly.  Gather all your documents in advance & don’t wait until the last minute to make sure your year-end tasks are not overwhelming:


•    Cash & Banks        
    - Reconcile your cash and bank statements with general ledger balances.
    - Ensure each and every item is accounted for.
•    Account Receivables     
    - Review customers list, amount owing, & accounts category.
    - Review A/R Aging report: collect as soon as possible and watch negative balances.
    - Revisit bad debt allowance whether it’s reasonable.  If there is a worthless account, write it off.
•    Fixed Assets         
    - Review purchase of fixed asset during the year.
    - Are all fixed assets still there?
    - Make sure all fixed assets and their depreciations are recorded as it should.
•    Inventory         
    - Check if all the balances are recorded properly – item descriptions, quantity on hand, purchase cost, & total value.
    - Perform physical inventory and compare this with book inventory. Make an inventory adjustment if necessary.
•    Others            
    - Recheck your prepaid expenses (e.g. insurance) and amortizations and whether any adjustment is needed.    



Remember that the basic accounting equation, from Introduction to Accounting: Part II, is :

Assets = Liabilities + Equity

And the expanded accounting equation is :

Equity = (Revenues – Expenses) + (Capitals – Withdrawals)

In transaction analysis, there are two (2) rules that we need to apply:

  1. Each transaction has at least two (2) entries, and
  2. The accounting equation above must always remain in balance after each and every transaction.

Thus, when we analyze accounting transactions, we need to:

For small business owners, you are taxed on your business profit.  You have to keep accurate records of all income flowing into the business and expenses incurred to earn those income.  This sounds like a major challenge as you are already busy with your other tasks of selling your products and/or services.

But with the following simple tips, you will be able to manage your bookkeeping and accounting without headache, and without taking so much of your precious time:


Now that we all understand what “Accounting” means from Introduction to Accounting: Part I, What is Accounting?, let’s move on the basic yet most important accounting equation, which is:

Assets = Liabilities + Equity

It is not just important to remember the above equation, but understand what it means as well, as you would use it for the rest of your accounting life.

Assets are economic resources owned by entity to produce value in the future. Cash is the classic example of assets. We own cash, say, to buy a laptop to provide value in operations of your business. Other examples of assets are account receivables, bank accounts, equipment, vehicles, etc.