Accounting reports are financial documents that are essential for the success of any company of any size. Accounting reports allow you to keep track of your financial history, forecast future revenue, and keep accurate records for tax purposes. Many companies create accounting reports monthly and some create additional reports for specific purposes.
In this article, we define what an accounting report is, explain why accounting reports are important, and describe three types of accounting reports.
What is an accounting report?
An accounting report is a financial report that a company files to show its past and present financial situation. With this report, businesses and financial analysts can also predict their financial situation in the future more easily.
An accounting report might include information from every part of the business, or it might only focus on a small goal, such as determining which department uses the most cash flow. Many businesses that closely follow their finances report accounting at least once per month. They might even do it more often, particularly if they are pursuing company-wide goals related to finances.
There are three common types of accounting reports:
- Income statement
- Cash flow statement
- Balance sheet
With these reports, a company can see its financial status over time as well as at one specific snapshot in time. All accounting reports should follow Generally Accepted Accounting Principles (GAAP) as established by the Financial Accounting Standards Board (FASB). These ensure accounting reports follow a set of principles, which include, but are not limited to, consistency, sincerity, and good faith.
Consistency means a business is following the same accounting practices from month to month and year to year. Sincerity means the person creating the report (the accountant) is being honest. When people are acting in good faith, it means that everybody involved in every transaction is honest.
When all businesses follow the same principles, it's easier to compare one business to another. This ensures companies do not misrepresent their information so that investors and others outside the company are not misled regarding the company's financial standing.
Why are accounting reports important?
Reporting in accounting is important because it allows businesses to have full knowledge of their financial situation. The benefits of accounting reports include:
- Knowing how well the business is doing
- Keeping track of transactions
- Maintaining a budget
- Assessing the financial situation
- Determining the profit of a specific product
When looking at an accounting report, a business can do many things, including:
- Track their financial history over time
- Determine if they are in good financial health
- Organize business transactions and invoices
- Report finances for legal and tax reasons
- Report financial information to investors and financial managers
To be successful, any business needs to keep track of its finances. For example, taking the time to accurately report tax information saves a company both time and money, allowing it to focus on its primary financial goals.
By tracking cash flow, companies can predict their future revenue. This helps them to budget and plan accurately. It also allows executives and high-level managers to make financial decisions that are in the best interest of the company. In day-to-day business, it may be more difficult to see the big picture and to determine what parts of the business may be losing money. Accounting reports help decision-makers to see their finances from a broader perspective, allowing them to make more objective and proactive financial decisions for the company.
Additionally, accounting reports are key documents that give financial analysts the tools they need for reporting accounting and communicating the financial situation to the rest of the company.
Why are accounting reports important for small businesses?
Accounting reports are important for small businesses because they help keep everything organized for taxes and they can help businesses increase their revenue. While it may be clear why big businesses with a large cash flow need accounting reports, these reports are important for small businesses as well.
When it comes time to file taxes, a small business can save a lot of time if someone has already filed and organized their accounting reports. All the information needed to file taxes will be easy to access.
Accounting reports are just as—if not more—important for small businesses because they have a smaller margin for error. While a large business could make a $1,000 mistake and not collapse financially, the same might not be true about a smaller business.
Additionally, because small business owners tend to work closely with their companies, it may be a bigger challenge for them to stay objective about what parts of the business are using too much money. An accounting report makes this clear and allows them to make wiser financial decisions.
Three types of accounting reports
Accounting reports come in different forms depending on what information a company needs to know. Below are three common types of accounting reports:
1. Income statement
An income statement is a report that details overall expenses and revenue to determine a company's overall net profit. Sometimes an income statement is called a profit-and-loss report.
To prepare an income statement, accountants use data from ledgers and accounting journals. The statement includes both primary and secondary sources of income to get an accurate number. Similarly, primary and secondary expenses are included in the income statement.
2. Cash flow statement
A cash flow statement shows where cash is coming from (cash flow sources) and where cash is going (cash flow expenditures). This helps a business see how well they are generating cash. Executives and decision-makers can use this report to see where cash is coming from and then where it is going, which could include:
- Business operations
- Financing
- Investments
A cash flow statement measures the cash flow between two dates. To prepare a cash flow statement, an accountant looks at the cash flow in every account, which may include equity accounts, liability accounts, expense accounts, revenue accounts, and asset accounts.
3. Balance sheet
A balance sheet shows an ending balance at one specific point in time. It often includes balances for assets, liability, and equity. The balance sheet allows the business to evaluate its financial reserves as well as liquid assets. It also helps potential investors or lenders see the financial state of the company.
Typically, a business sets an accounting cycle, and someone prepares a balance sheet at the end of each cycle. Like an income statement, data for a balance sheet comes from the ledger.
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