- Accounting reports show the financial health of your business.
- Cash flow statements, profit and loss statements, and balance sheets are among the most popular types of accounting reports.
- Accounting reports are used by company leaders, as well as outside accountants, lenders and insurance providers.
- This article is for business owners who want to learn more about what accounting reports are and what they used for.
To understand the financial status of your business, it is critical that you keep accurate records. Having solid, easy-to-understand accounting reports when you need them is a good step toward ensuring you always know the current financial state of your business. The best accounting software generates dozens of reports, so it is important to know which ones you should be paying close attention to.
What are accounting reports?
Accounting reports are statements that show the financial health of a business. Some reports show the results of a company's operations over time; others reveal a snapshot of a company's financial condition at a particular moment.
Common examples of accounting reports include balance sheets, profit and loss statements, statements of free cash flow, and statements of owner equity. There are also consolidated earnings statements (for companies that have multiple departments or divisions), as well as more specialized reports, like accounts receivable aging. But all of these reports have the same goal: to reflect the current financial state of a business.
These accounting reports are prepared regularly by a company's senior management to guide company strategy and facilitate decision-making. Reports prepared according to generally accepted accounting standards can also be used to present to shareholders, lenders or insurers for various purposes.
These reports are not normally used in tax filings, but when used appropriately, they can certainly help small business owners understand their potential tax liability at any particular point in time.
Editor's note: Looking for the right accounting software for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.
Why accounting reports are important
For most of use, when we think of accounting reports, we immediately think of taxes. And, sure, taxes are always a consideration when reviewing a company's financials. But these reports are much more impactful and much more commonly used for other purposes. Most notably, these reports are used by management within a company to get insight into what's happening in the various segments of a business and make decisions about its operation – how to generate revenue and grow profits.
Some other situations where accounting reports are especially significant include:
- Conducting a business valuation
- Getting prequalified for a small business loan
- Determining business insurance types and coverage requirements
For larger companies, accounting reports are also important for presenting the company's financial condition to shareholders, so they know what's happening within the company. These reports provide key insights into the financial status of a company and the results of its recent operations.
Types of accounting reports
There are many different types of accounting reports that are used to reflect various aspects of a company's financial status. However, there are four or five core types of accounting reports that are used by most small businesses. All of these are available from most small business accounting software packages:
- Balance sheet. A company's balance sheet is a snapshot at a particular point in time of its assets, liabilities and shareholder equity. The statement is essentially a list of the assets, debts and net value of the company, each broken out by category (long-term vs. short-term debts, for example).
- Statement of profit and loss (P&L). A P&L statement shows a company's income and expenses by category over a set period of time. It's used for showing the strongest and weakest areas of a business, and is also used to compare a company's recent performance to the same period in previous years to measure change.
- Statement of free cash flow. This report shows how much cash is available to pay creditors or pay dividends to investors. To determine that amount, you take the total sales revenue and subtract your costs and operating expenses. This statement helps the company manage cash flow that isn't required to continue operating the business.
- Statement of shareholder equity. A statement of owner's equity breaks down the net book value of a company into various categories to show shareholders exactly how much their investment is worth on paper (if the company were to be liquidated).
- Accounts receivable aging. Companies that invoice use accounts receivable aging to show how long any receivables have been outstanding. Though some also use accounts payable aging to show how long any payables have been outstanding, for most businesses, it's more important to account for the money you're owed. What you owe appears in the liabilities section of a balance sheet, even if it's past due.
Did You Know?: While there are multiple types of accounting reports that are available, three important reports you want to pay attention to is the balance sheet, a profit and loss statement, and a statement of free cash flow.
In addition to these core reports, there are many others, and many more permutations of each, adjusted to meet the circumstances of individual businesses and the preferences of their owners and managers.
Lots of executives create custom reports as well. These versions may focus on the areas of the business that management wants to track most closely, or compare recent results with those from the same time period last year.
How do you prepare an accounting report?
The process of preparing an accounting report generally depends on the report, the size and scope of the business, the amount of detail you want to include in the report, and the time periods being compared. Generally, the process involves totaling certain accounts for a set period of time.
Modern accounting software can generate most accounting reports automatically, so the process for creating them varies only based on the accounting software you use. Here are some popular reports and what they entail:
- Balance sheet. Add up the value of all company assets (cash and cash equivalents, inventory, equipment, property, etc.) and subtract all liabilities (outstanding loans, unpaid bills). Break down what remains (shareholder equity) into appropriate categories (shareholder equity, goodwill, etc.)
- P&L. Aggregate revenue by category over the preceding month, quarter, year, etc. (whatever range you want) and then deduct expenses (by category) over the same time frame.
- Statement of shareholder equity. Calculate total equity (measured by the difference between total assets and total liabilities), then break out the total into relevant accounts – contributed capital, net income, retained earnings, dividends, and so on.
This process can be repeated for other reports you wish to generate. What's more, most accounting software usually offers the option to customize reports – to select dates and to decide which accounts to include/exclude –to generate the most insightful reports for company management.
How accounting reports are used
Accounting reports are predominantly used by a business's senior managers to assess financial situations and measure results. Even more importantly, the insights gleaned from various reports are used to make decisions about a company's general strategy.
For example, a P&L statement can be used to compare operating results with previous periods to see which parts of a business are growing or shrinking. A balance sheet shows how liquid a company is – how much cash is available for investment in expanding business. Reviewing these statements can help managers determine where and how to invest company resources to increase revenues, cut costs, and maximize revenue.
Managers aren't the only ones looking at accounting reports. Here are a few examples of who else looks at financial statements and why:
- Accountants. A company's accountants may review reports to decide whether certain tax strategies may be advantageous, or when valuing a business for a potential sale. Sometimes these reports may be required by regulators, depending on what industry a business operates in.
- Lenders. Banks and other lenders assess a company's financial condition to decide whether it qualifies for a loan. Banks have their own forms and reports that need to be completed as part of a loan application, but company accounting reports can provide a preliminary indication of whether a business may qualify.
- Insurers. Insurers can look at company financials to determine what types of insurance a business may need and how much coverage may be required to provide it adequate protection.
- Shareholders. Current and prospective investors often review company accounting reports to assess the value of the company and its future prospects. These reports can be extremely thorough but are also often condensed.
These are a few of the hypothetical situations that illustrate why it's important to be able to customize financial reports ‒ they help you provide better insights for the shareholders, lenders, accountants, and others who may review them.
Key takeaway: In addition to being used to help set strategy, accounting reports can be used for tax, lending and insurance purposes.
Accounting software reports
Thankfully, accounting reports of all types can be easily generated using most off-the-shelf accounting software packages, and these reports can be updated continuously to provide up-to-the-minute (though unaudited) insights into what is happening in your business and the financial standing of the company.
If you're going to invest in accounting software to help track your company's finances, you should be sure it is capable of generating these reports easily. Some common options you should check for include:
- The ability to adjust time frames and compare results to the same period in previous years
- The option to specifically include or exclude individual accounts or line items
- The ability to add notes explaining atypical results in particular accounts or categories
- A way to create your own custom reports on your own template that shows the information that is the most important to you
These features will give you tremendous flexibility to dissect your company's financials and make the most informed decisions about the management of your small business.