Assumption: It is assumed that all the companies are in countries that have fully absorbed IFRS standards.

A Balance Sheet

A balance sheet (BS) gives the financial position of an organization. In simple words, it is a financial summary of a business that gives reader an insight into the company’s financial standing.

IFRS has given a detailed pattern of balance sheet that has to be followed by all the organizations. It clearly states the items that have to be included or excluded in the balance sheet. The BS must clearly include all the company’s assets, liabilities, and equity.

The simple accounting equation, which is used to reach balances, is:

Assets = Owner’s Equity – Liabilities

A Profit and Loss Account

A profit and loss statement, as the name suggests, gives the financial position of a business in a given year. Unlike balance sheet, it only revolves around revenue and expenses.

IFRS gives a clear definition of revenue and expenses, explaining when an expense or revenue has to be recorded. Since businesses often run on credit, it is very important to have a clear understanding of accrual basis of accounting, which is very clearly explained in the IFRS.

A profit and loss account simply subtracts the revenue (direct earning of a business) from the expenses to reach profit. In case of a manufacturing account, one must reach the gross profit by first subtracting cost of goods sold (COGS) from the revenue.

Revenue – COGS = Gross Profit

Gross Profit – Expenses = Net Profit

A Statement of Changes in Equity

IFRS requires every business to prepare a separate Statement of Changes in Equity. It mainly shows the effects of relevant transactions on the owner’s equity.

A few things that are considered include:

-  Profit and loss

-  Retrospective application

-  Dividends

-  Owner’s investment

A Cash Flow Statement

A cash flow statement shows the effects of transactions on cash and cash equivalent. It is the accounting head that sums up all the transactions that involve cash. IFRS clearly explains that transactions that do not involve movement of cash from/to the individual or company must be excluded from the cash flow statement, because such transactions have no impact on cash and cash equivalent.

The three heads of a cash flow statement are:

-  Cash Flow from Operations

-  Cash Flow from Investment

-  Cash Flow from Financing

All the above mentioned statements must be prepared keeping in mind the IFRS requirements.

Investment bankers are often assigned the task of selling a company or raising enough money to get the business started again. Though you may try selling your company without any help from an investment banker, but it won’t guarantee you a safe return. That’s because almost everywhere in the business world, acquisitions and investments are carried out through bankers. They act as mediators between the buying or investing and the selling party.

Usually, investment bankers are tasked with the responsibility of introducing your company to possible acquisitions and investments. The banker is also responsible for completing the deal between you and the management of the organization that’s about to invest in your business.

When you’ve hired a banker to sell your business or find investments, he or she will guide you step by step through the entire process. At first, the banker will provide you with a PowerPoint presentation that he’s created. The banker will make every possible effort to hire the best personnel working in the presentation field to make sure that the acquisition or investing takes place without any problems.

Investment bankers are also obligated towards turning what it is that your company does into something that’s worth investing. And after the presentation is complete, it would be presented to you and the rest of the management personnel before getting a final approval. Once all the personnel have agreed to the contents of the presentation, it will be presented in front of the potential investors and buyers.

Another reason for hiring these guys is that they actually know who’s a good buyer or investor. Since they deal with these cases on a daily basis, they’re readily in contact with management seniors of other companies. An investment banker is responsible for the entire process from introducing you to investors to closing the deal.

When it comes to the expenses of hiring a banker, the process is rather expensive but it does yield positive results if you’ve chosen the right banker. An investment banker will take six percent of the money you’ve raised on your company.

Before hiring a banker, always make sure that you’re comfortable working with him or her because if you’re not, a lot of problems are going to crop up. You should be able to interact with the banker on a personal level. Also, avoid hiring thugs that randomly send your company offer to investors that they don’t even know or worse they don’t possess any contact details of that investor. Your dealings are bound to occur smoothly once you’re with the right banker.

Best practices in accounting were introduced for the very purpose of saving valuable cash and time along with increasing the productivity and efficiency of your work. And when your equipment and workers are performing at an optimum level of efficiency, profits are bound to come in without any major losses.

Basically, best practices in accounting deals with capital budgeting that involve minimal input of cash and therefore, it’s the most appropriate way of curbing your losses. These best practices can be used by anyone who’s staring up a company or dealing with a business that’s been going through some bad times in terms of financial security. These will also help you save time along with lesser cash input and maximum profits.

Reducing Cash Outflow

For effectively reducing the outflow of cash, you must first study the causes that are causing it. For example, if you possess machinery or equipment that’s not functioning properly, you could always look for repairs instead of purchasing new ones. Expenses made on repairs are often cheaper than the ones made on buying brand new equipment.

Extending the operating hours of your machinery is also a good option. Instead of having your equipment being operated twice a day, you can have it working in three shifts. This will increase production along with yield profits. Though the machinery may require more maintenance from time to time, it would still cost you a lot lesser than purchasing something brand new.

Also, try purchasing equipment that’s second-hand. Though it may be worn out, it’ll certainly cost less. You could always get a leasing company to issue you a lease over collateral equipment which will also help safeguard your capital. A rule stating that all new equipment can only be purchased with the CEO’s consent can also be enforced.

Increasing Cash Inflow

Once you’re done with controlling the cash outflow, you can focus on increasing the inflow. This would include investing in machinery that provides profits per day instead of weeks. Equipment that generates revenue faster will increase your cash inflow which could result in the purchasing of better machinery. Thus, the profits will continue coming in and you’ll have to spend less on production. Making good investment choices is the key to increasing capital inflow.

When a business is prospering and making large sums of profits, its chances of being duped by some corrupt client or someone from the workforce. Hence, auditing becomes a must in these situations. Now the audit can either be internal, external or independent where the internal audit would deal with the checking of accounts being done by the company’s own auditors.

On the other hand, the external audit could be conducted by a party of extra auditors called in from outside. The third type of auditing which is independent of the rules and customs of the business being audited will have auditors come over from organizations that specialize in these tasks.

Therefore, it is imperative for companies or businesses to keep their accounts clean and avoid independent auditing that could wreck their image in the market.

To initiate the accounting process, a company or business must have a good control over their accounts. Every transaction made regardless of being new or old should be jotted down in a journal. Every journal should have specific entries about the area of investment that’s being recorded in it. For example, transactions made on sales should go into the sales journal with purchasing into purchase journals etc.

Having journals placed with each recording will help get your papers in place when it’s time for auditing. This means that every cent you pay in accordance to your company should be accounted for and has a receipt as a proof of the transaction.

Preparing the documents for your source of income and way of expenses will give you a balance sheet. This balance sheet will provide you with detailed information on how your money is being spent or saved and what steps you can take to increase the inflow of profits in your business.

The Formula

The formula basically shows the company’s assets which are owned by purchase, are liabilities or that are investments made by the owner. The following equation represents this relationship as follows:

The equation above has to be balanced as a best practice. That’s because anything owned by the company has been purchased through an investment in some form. It could be as a liability or through the owner’s capital. In accounting, “assets” refer to items in the inventory, or accounts receivable. For example, bank loans business profits and accounts payable. On the other hand, owner’s capital refers to the capital or investment the owner has in the company.

Other Representations

The Accounting Formula can also be represented in two additional ways:

If any two components of the equations are known, calculating the third component can be very easy. When one analyses the balance closely, it becomes even more obvious that the balance sheet is an extension of the Accounting Formula.

Keeping the Accounting Formula Balanced

At the start of a company, the Accounting Formula looks like this:

Let’s assume that the owner of a specific company invests $1,000 into the checking account to start the business. If the business uses the double-entry bookkeeping system, then the Accounting Equation will be as follows:

Later, the business purchases office stationeries for a specific best practice, using cash worth $150. This means the equation will look like this:

This is because expenses reduce the owner’s equity. From the equation, it can be inferred that the asset account titled “Office Supplies” increased by $150. As a result, the cash account reduced by $150. Therefore, despite of the transaction type, it is mandatory that the Accounting Equation remains balanced.

Accounting Formula Expanded

When the equation is expanded, it shows the relationship between the balance sheet and the income statement. The components of Owner’s Equity can be separated into expenses and revenue. This brings these two aspects into perspective in order to facilitate the best practice of accounting.

Revenue is also referred to as “Sales Revenue”. This is what a business earns in exchange for its products and services. Expense on the other hand, is a cost incurred by the business to provide the products and services.

Therefore, the relationship between revenue and expense is very simple. If revenue is greater than expense, then it means the business generated a profit. Likewise, if revenue is less than expense, then it means the business sustained a loss.

Owner(s) of the company can withdraw an equity or salary from the business. When the company is incorporated, salary can be as dividends paid by the company. Similarly, when the company is a partnership, limited liability or as a sole proprietorship, the owner will withdraw a portion in the form of a salary.

Having a balanced Accounting Equation is an important best practice. If this is not achieved, the financial report will not make complete sense. This will also hinder keeping track of financial transaction.

Recognizing the values of these general accounting principles known as GAAP (Generally Accepted Accounting Principles) is a recommended best practice for business people. There are ten principles and standard guidelines upon which these principles are based:

• The EEA Best Practice: EEA (Economic Entity Assumption) is a best practice where it is assumed that the sole proprietor and the business owner are two individual entities.

• Standard Monetary Unit: For the purpose of best practices in accounting the economic activity is measured in a standard currency. This is the U.S dollar.

• Assumption on Time Period: This is an assumption that it is impossible to report business activities for a specific time interval. Even though it is considered a best practice to report activities at all times.

• Principle of Cost: The money spent on purchasing is known as a cost. Therefore, a history of costs of purchases in the financial statement is known as the historical cost.

• Principle on Full Disclosure: When information is important to an investor or a lender, it should only be disclosed as included in the financial statement for best practices.

• Principle on Concerns: Generally, it is assumed that a company will not close down until it completes its targets and objectives. The company is usually expected to continue operating in the future for as long as it can with best practices.

• The Matching Principle: Companies are obligated to use accrual accounting basis as a best practice. This requires revenues to be matched with expenses as a best practice.

• Principle of Revenue Recognition: When accrual basis are used for accounting, then revenue is recognized when an item is sold, or a service is provided. When the money is received is not a requirement, recognizing the revenue is the important best practice.

• Principle of Materiality: Accountants are permitted to violate an accounting principle if the amount of revenue is insignificant or considered immaterial.

• Principle on Conservatism: When there is more than one alternative for reporting available, conservatism guides accountants to choose the alternative that results in a less net income or that reflects as a lesser asset amount. This is a sensitive best practice and making a choice can be tricky.

Advantages of Accounting Principles

These principles or best practices guide accountants and form the basic foundation of accounting. Complicated, legalistic and detailed accounting rules are based on these principles.

These guidelines and principles are used by the Financial Accounting Standards Board (FASB). Therefore, understanding these principles make understanding GAAP easier with best practices.

Disadvantages of Accounting Principles

Their complexity over the years has made compliance with them quite difficult. Although they are an essential and recommended best practice, they are usually considered cumbersome due to their complexity.

Compliance with these best practices is the basis of all financial institutions. Accountants and business owners must enlighten themselves about these principles and include them as a daily best practice. This is the key to success in terms of accounting.

Let us assume that a company invests $600,000 in a new project. The project produces $100,000 every year as cash flow through best practices. This means that the payback period is six years. The formula used is:

Payback Period =             First Investment =             $600,000 =             6 years

Annual Payback                                                $100,000

Advantages and Disadvantages of Payback Period

The advantages of calculating the payback period are all about risk assessment and risk management best practices. This provides a quick idea about the period of time the initial investment will risk ensuring compliance with best practices. Most business people tend to evaluate the risk involved with any investment based on the payback period. They hold on to the best practices of not investing in those assets that have longer payback periods.

However, this is more useful for those businesses where investments turn obsolete too soon. Similarly, payback accounting works best for those businesses where the return of the initial or capital investment is a major problem.

By using the payback accounting formula, one succeeds in best practices. It assists business people estimate the payback period, but there are some setbacks.

• Life Span of the Asset: The formula does not give any idea about the life span of the asset in which the money invested. If the purchased asset expires after the payback period, there will be no additional generation of cash flow. This is bad for best practices.

• Complexity of Cash Flow: Cash flow is complex and has multiple aspects related with the various cash flows in any business. In addition, cash flow in most businesses changes over a short and sometimes long period of time. This formula is too simple to account for the multitude of cash flows arising along the line. Therefore, it is not a recommended best practice.
• Tracking Profitability: Payback accounting focuses on the time the payback will take, and not on the ultimate profit of the project. The payback accounting formula cannot determine the expected profitability over the period of time. This does not help with compliance best practices.

• “Time Value of Money” Factor: The payback accounting formula does not consider the time value of money factor. Therefore best practices are not implemented effectively.

• Wrong Averaging: The formula uses the average cash flow over the specific period of time in the denominator. However, if the forecast of the average cash flow is expected to be farther, the estimated average figure can be a wrong figure. This means the formula is not always accurate for average annual paybacks over longer periods of time. This can affect best practices negatively.

Nonetheless, using the payback accounting formula is an ideal best practice for both small and large business. It also helps with capital budgeting to promote best practices.

Economic Trends: The impact of a recession can be long lasting and affects small businesses drastically. This does not only affect the state of financial affairs in the business but also induces unemployment. Recently this is what affected many small businesses and accounting firms in the United States. In order to cope with the issue of unemployment, there was a shift in forms of business.

At the same time, new jobs and business trends have evolved. Now jobs like freelancing, social media marketing and home based businesses is the latest in economic trends. To ensure any business survives difficult economic situation there is need for best practices in employment rate.

Additionally, firms offering home based businesses must ensure compliance with best practices in respective accounting firms. There are political and governmental regulations small accounting firms must follow. Similarly there is the need to survey the markets and analyze demand and supply to minimize loss. This is necessary in order to ensure risk management no matter what form of business it may be.

Social Trends: The latest social trend is to socialization between marketers and customers. Social media websites have become a rich source for advertisements and business opportunities. There are new strategies in marketing and advertising which have come about. Small businesses ensure best practices by using these tools and strategies for success. Social trends have also contributed to the security of businesses for small businesses.

Technological Trends: There are new technological advances resulting from the growth in social trends to help small accounting firms. For example, iPhones and blackberries have made business very convenient, available and affordable all over the world. Additionally, the new concept of cloud computing has increased efficiency and communication in small businesses. This is especially useful for franchises, financial institutions and banks. Similarly, developments in technology also include new machines for production and transportation of goods.

Using technology also cuts down the expenses of small accounting firms and helps with capital management. Therefore small firms can utilize their finances appropriately and focus on administrative requirements. There are latest technologies like call receiving software applications which can record calls while owners are not available. Business owners don’t lose any opportunity for business.

To ensure best practices, it is a requirement for small accounting firms to ensure that they are up to date with these latest trends.

Cash flow management involves tax and accounting evaluation. Therefore, every business requires best practice involving staff handling tax and accounting in business firms. Additionally, there is need for coordination between the staff in the treasury and operations department. These best practices along with powerful electronic tools assist in collection of data on financial information and formatting. This is necessary for generation of reports to help managers in making decisions.

In order to facilitate best practices in managing cash flow there are some important steps which can be taken. These include:

Selecting a Banking Partner:

When companies shop for the right bank for support with cash management they tend to look for quality of services rather than low cost. Banks therefore offer their business clients with Electronic Data Interchange (EDI) and automated processes. Automated processes may be payrolls and account payables and others. This ensures security against theft as well as affordable outsourcing option for organizations. This is one of the reasons why banks consolidate their accounts with few banks and are not dependent on a single bank as a best practice.

Models for Accurate Cash Forecast:

There is a lot of uncertainty about cash flow. This is why companies use forecast models as best practice to assist them with disbursements. Forecasts are made based upon the daily, monthly, seasonal, and cyclic patterns and trends. There are three forms of forecasts to help companies in assessing how well it fares;

• Short term: covering 1 day to 2 weeks
• Medium term: a few weeks, 1 year or may be 2 years
• Long term: covering 1 year, 2 years or  more

The best practice most companies ensure is to use the “rolling format” which continuously updates incoming receipts and assists in disbursements. Additionally, this increases accuracy of forecasts and assists the company in “cash critical periods.”

Maximized Investments:

It is a best practice for companies to have clear, transparent investment policies indicating their objectives, guidelines and acceptable investments. These assist managers in making decisions according to opportunities. The aim is to increase yield of investments at low costs. Additionally, companies use Sweep accounts.

These are effective because they allow companies to “sweep” or move the idle cash into overnight investments at the end of the day. Sweep accounts allow companies to use zero balance accounts to write checks and drafts without penalty charges. The amount of money is drawn from central accounts to make payments for the company.

Regular Cash Management System Review:

Identifying weak areas in a company is a best practice which helps in improving the cash management system. This provides the assurance that the company’s financial data is reliable and accurate without the need for an audit. Therefore, this best practice ensures that collection and payment processes are reviewed regularly for evaluation of cash flow and its management.

Cash flow Management is one of the most effective and recommended best practices. It is necessary because it ensures accurate audit reports and annual financial statements of businesses and other financial institutions.

Generally Accepted Accounting Principles

This is the accrual basis of accounting, which indicates that income and costs are recorded when a transaction takes place. The Financial Accounting Standards Board (FASB) established these principles after the Securities and Exchange Commission granted it authority.

Asset

An asset is any item which has a monetary value and has a useful life of more than a year. Examples of assets include the office furniture and equipment used for manufacturing goods and services.

Liability

A liability is a debt which is to be paid to creditors and other companies, such as utility bills.

Capital

This is the net worth of the business. It is usually calculated by deducting the assets from the liabilities (Capital = Sum of Assets – Sum of Liabilities).

Revenue

Revenue IS NOT equal to profits. Profit is the money accumulated after the sale of goods or services after the deduction of expenses. However, revenue is the sum of money collected from sales before expenses are deducted.

Selling, General and Administrative (SG & A) Expenses

Any costs incurred while doing business, starting from employees’ salaries to the maintenance of equipment, are included under this term.

Net Income

Net income is the sum of money left over after costs are deducted from revenue. This is important because net income will determine whether a company is profitable or incurring losses.

Budget

This is the forecast of the company’s income and expenses in the future. Again, this is important for managers to plan their next move in the market.

Operating Budgets

These are short-term forecasts which can go up to a year. They usually determine the income, expenses and sales revenue which a company should expect.

Capital Budgets

This is the opposite of operating budgets. A capital budget is a long-term forecast which helps the company determine how it should finance its long-term outlays for fixed assets.