Accounting and bookkeeping are two different but related functions. Bookkeeping is the process of maintaining a proper set of books and is the basis for accounting. Accounting is the process taking the information in the books and putting it into a format, also known as reporting, that can be used by the owner/manager of the company or by interests outside the firm.
Complete and Professional Accounting Services
These reports are generally required by users outside the firm. The most obvious users of external reports would-be bankers, investors and government agencies such as the Internal Revenue Service.
These reports are prepared according to a specific set of rules, known as Generally Accepted Accounting Principles (GAAP), which attempt to give the external user some level of assurance as to the financial condition of the company. There are three types of external financial statements:
- Balance Sheet. A summary at a specific point in time that shows what the business owns (Assets), what the business owes (Liabilities) and the claims of ownership (Equity)
- Profit and Loss (Income Statement). A listing over a range of time (monthly,quarterly, annually and even daily) of the operations of the company. It will show the company’s revenue for the period, the associated expenses and the profit or loss it has generated.
- Statement of Cash Flows. A report that shows the sources and uses of cash within the company and attempts to reconcile cash flow with profit (which are two entirely different things)
External reports typically are issued by a company’s management but may have aletter attached by a CPA firm providing various levels of assurance as to the fair presentation of the information. There are three types of assurance:
- Compilation. This is merely an assurance by the CPA firm that the financial statements have been issued by management in accordance with GAAP. No opinion as to the fairness of the financial statements is given.
- Review. More than a Compilation but substantially less than an Audit (see below), a review entails a series of tests and analyses by the CPA firm to give a limited level of assurance that the financial statements do not require any material modifications as well as being in accordance with GAAP.
- Audit. An audit provides an assurance that the financial statements presented by the company management are fairly presented without material misstatement in accordance with GAAP. It is a time consuming and expensive process that basically entails verifying the balances of each item on the financial though examining source documents, evaluating internal controls, third party confirmations, and any other necessary procedures. An audit is most often performed for very large public companies whose stock is traded on an exchange. It is rare to see a small privately-owned business require an audit.
We prepare compiled and reviewed statements but do not perform audits. If your firm needs an audit, we can refer you to a reputable company that performs them.
These reports are generally used by internal management of a company and are rarely, if ever, given to external users. They too are generated from the bookkeeping system, so the importance of a proper set of books remains, but the format of the reports is much more tailored to management use and, while GAAP is important, it is not the underlying basis of the reports.
These reports can and will include a monthly Balance Sheet and a Profit and Loss, but it is rare to see a Statement of Cash Flows. More likely, the following reports will be prepared among many others:
- Budget versus Actual
- Daily cash on hand and projections
- Collection reports
- Cost reports
- Tax projections
- Profit and loss by location, department, product line or any other meaningful category and for any time frame
While the information for these reports is generated from the bookkeeping system, most accounting programs, except the most expensive and complicated ones, do not provide the tailored reports that management requires. More likely, the information has to be exported into a spreadsheet program where it can be formatted accordingly.
Our CPA firm can provide the basic internal financial reports (Balance Sheet and Profit and Loss) as well as work with your company to create specific reports tailored to your management needs.