Bookkeeping in accounting refers to an accurate record keeping of financial transactions. The financial statements are prepared from the transactions that have been identified, approved and sorted in order for the information to be meaningful. For example, some of the company’s financial transactions that are analyzed to produce insightful financial statements include:
1. Purchases of supplies in cash and credit
2. Sales of merchandise in cash or credit
3. Rental expenditures
4. Salaries and wages
5. Buying office equipment, and many other transactions
For a business to make meaningful information from these transactions, they have to be analyzed and processed to form financial statements. This is the process of bookkeeping. After bookkeeping the financial statements are further analyzed and used to make decisions to drive its performance. To perform analysis on financial transactions, the following tools are used.
Financial Ratios
A financial Ratio is a common tool used to assess business performance. Financial ratios take the information stated in the financial statements, that are then used to calculate indicators that the business uses to determine its financial position.
Following financial ratios are quite useful when assessing business’ wellbeing:
1. Liquidity Ratio; this is the ratio between liquid assets and the liabilities of a business. They are used to gauge the ability of a business to cover the short-term liabilities, by using the assets that the business has.
2. Asset Turnover Ratio; this is the ratio between the value of company’s sales and the revenues generated in relation to the value of the assets. This ratio is used as an indicator of the efficiency that a company deploying its assets in the generation of revenue.
3. Financial Leverage Ratio; this is the financial ratios that are used to determine the level of debt that a business incurs against other accounts.
Vertical Analysis
This is conducted by the use of common size statements. By common size financial statements, we are referring to the financial statement in a percentage figure that is indicated on each statement line item. There are different options that can be used in the vertical analysis to review the financial information that is in financial statements. The managers can decide to look at the percentages, or they can opt to view the whole amounts in figures. The percentage figure will refer to how an individual item will compare to the totals that are given in the financial statements. Alternatively, they may decide to look at the whole amounts as presented in the financial statements.
Horizontal Analysis
This refers to the comparison of an item in the current financial statement, to the previous year’s financial statement. This will inform the business the trend that is being taken on the liabilities and the assets. Basically, this tool will involve checking item per item and comparing the current financial period to the other financial period. This could be comparing this financial year to the last financial year.
Whatever the bookkeeping analysis tools suggest of the business should be looked at seriously before the owners determine any move regarding the business. These tools are important indicators of the financial position of a business.