Recording Financial Transactions

Bookkeeping is the exercise of recording all the transactions that take place in a business.

Accounting, on the other hand, is the methodology used to accomplish this goal and to prepare related statements and reports. Accounting guidelines govern how businesses record transactions. They also dictate the design of the recordkeeping system that a business uses and how reports are prepared, based on the information gathered and put into the system.

A useful budget is prepared under the same umbrella of guidelines as the company’s actual financial statements. There must be consistency in the way the numbers are prepared. As such, it is necessary to understand some key terms.

Financial Statements vs. Financial Reports

This brings us to another question. Often, we hear the terms “financial statements” and “financial reports” used interchangeably. Is there a difference?

For the purpose of our courses, yes, there is a major difference. A financial report is a document prepared for internal company use. It can come in many forms and be used for many purposes. A financial statement is a formal document prepared in a specific format as outlined by your region’s Generally Accepted Accounting Principles (which we will discuss in a moment) or another governing organization (such as your tax legislation).

Types of Costs

There are two parts to a budget: sources of cash and uses of cash. When we think about uses of cash we can break them down as follows.

Sunk Costs

A sunk cost has already been incurred; it just needs to be paid. It is the result of a past irrevocable decision and is sunk in the sense that it cannot be avoided. As a result, sunk costs may not impact future decisions.

Recurring Costs

Quite simply, recurring costs recur and require a periodic outlay of funds. Material costs, supplies, heat, and lights are prime examples.

Generally Accepted Accounting Principles

Accounting forces people to measure things in a relatively consistent manner. A good budget is prepared based on consistent rules as well. Accountants refer to the rules in their rule book as generally accepted accounting principles (GAAP). The objective of GAAP is to ensure comparability among different companies and overall reliability of information.

While there can be slight differences between regions, GAAP typically includes the following principles:

  • The matching principle: Earnings and expenses must be booked in the relevant accounting or budget period when one benefits the other. This is necessary to properly evaluate results.
  • The cost principle: Assets and service, and the resulting liability, are taken into the accounting records at cost.
  • The consistency principle: A company’s accounting procedures need to remain consistent over time. If they are changed, the reasons for the change and the financial impact of the change must be documented in detail.
  • The objectivity principle: Whenever possible, the amounts used in recording transactions are based upon objective evidence rather than on subjective judgments.
  • The realization principle: This principle defines revenue as an inflow of assets (not necessarily cash) in exchange for goods or services. It requires the revenue to be recognized at the time, but not before it is earned.

Budgeting Terms

budget is an operating plan that outlines projected revenue and expenses for a particular period of time.

projection is a prediction for the future, based on past data, extrapolation, and summarizing key factors.

Forecasting is the process of putting together several projections to create a projection for the future. (Think of a weather forecast.)

Extrapolation is the process of applying past data to the future to arrive at a reasonable projection.

Your Role in Company Finances

Once you’ve thought about your role, think about your organization and look at what financial-based roles exist. Understanding their responsibilities will help you get a better picture of what your role is, and it will help you identify who to go to when you need help.

Here is how many mid-sized organizations are structured, although not all organizations will have all roles:

The Key Players

The board of directors usually leads the company’s financial direction. Their vision is usually carried out by the Chief Executive Officer (CEO).The CFO, or Chief Financial Officer of a company, is just behind the CEO.