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Business owners don’t need a degree in accounting, but they do need to know how to read basic financial statements and when to ask the accountants who prepare them to explain what they don’t understand.
No one wants to be like the business owner who believed she was making a profit because her checkbook had a positive balance. But even business owners who diligently record financial transactions using basic accounting software don’t always comprehend the reports their CPA generates based on these records.
That means they’re not using the expertise they pay for, and they’re not using the numbers as tools to build their business.
The three financial reports every business owner should understand are the profit and loss statement, the balance sheet and the cash flow statement.
Profit and loss: The P&L, or income, statement shows how much profit a company makes — or doesn’t make — over a given period. The statement reports revenues, expenses, gains and losses. If a positive balance remains once expenses and losses are subtracted from revenues and gains, the result is net income. If the balance is negative, the statement shows a net loss.
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