Alternativas y Procesos de Participación Social A.C. P.O.Box Apartado Postal 306 Tehuacán 75700 Pue. México e-mail: email@example.com Tel/Fax: (238) 2 50 65 and2 41 97 Edited by: ADA Appui au Développement Autonome, Luxembourg Alternativas y Procesos de Participación Social A.C. Web edition produced by Jennifer Heney for the Rural Finance Learning Centre 2006
We all carry out economic activities; we earn money, buy, invest, take loans, repay our debts or at least try to do so. But we do not always know the exact value of our net assets,our income or our expenditure. Accounting helps us to manage these operations. Lack of accounting knowledge is akin to being illiterate in the world of money management. Accounting is necessary for decision-making, managing a household or job, and for reporting on monetary operations involving other people's money or our own. This is a web version of a book prepared by ADA (Appui au DéveloppementAutonome), a Luxembourg based NGO, and Alternativas, an NGO based in Mexico. ADA supports microfinance institutions in developing countries and helps to promote better financial management by microentrepreneurs. Alternativas is a nonprofit private institution that promotes the development of the poorest rural population through water projects, agro-industrial cooperatives and development finance,with an educational approach. The authors have set out to demystify accounting and to convey an understanding of the usefulness of basic accounting instruments by showing how they are produced and how they are to be interpreted through the eyes of children.
Chapter 1: Chapter 2: Chapter 3: What is a financial statement? The Balance Sheet How to start accounts in a business Step 1:Step 2: Step 3: Chapter 4: Chapter 5: Acquiring the funds Setting up the enterprise Starting production 1 6 13 14 26 30 35
The Income Statement The Balance Sheet and Income Statement
1. What is a Financial Statement?
When we want to know the state of our personal health, we go to a doctor, who gives us a physical check-up. The doctor examines us and does some tests, then gives us theresults, which shows us the state of our health.
Similarly, to know the state of our business's economic health, we go for a check-up which tells us its financial statement.
The financial statement is presented through two main documents: The Balance Sheet and The Income Statement The Balance Sheet is the document that shows us all the things we work with in our business.The Income Statement, also known as the Profit and Loss Account, is the document that tells us what we have managed to obtain through the work of our business.
It is like a photograph taken at a specific time that shows what resources we have built up since we began. -3-
It is like a film telling us what we have gained and what we have spent during a certain period of time. It also gives usthe "bottom line" – how much we are making or losing.
2. The Balance Sheet
The balance sheet has two columns to show us all the things we work with:
These two documents, the Balance Sheet and the Income Statement, are complementary and must be analysed together. In this way we will be able to understand their inter-relationship as well as the general financial situation of ourbusiness. If we understand the Financial Statement of our business, we can make appropriate economic decisions.
In the left-hand column we are going to record what we have and how much it is worth. In the right-hand column, we will record who owns what we have. We are going to imagine these columns as filing cabinets.
We refer to all we have as assets; that is, all the things we...