Running a business in an efficient manner includes understanding important terms that will enable the company to maintain its financial stability. While most firms have an accountant to assist them in record-keeping, there are still basic terms that ought to be familiarised as they will be commonly used in the world of business.
Besides knowing the different accounting terms, you should also understand how it is used in regular business practice.
These terms are usually used and applied in the early stages of business development when new owners begin their venture into entrepreneurship. It enables owners to recognise the difference between profit and loss, debts and credit, income, and expenses, etc. This applies to all types of business entities in Indonesia.
What is a Financial Statement
Financial statements usually provide an overview of the business details including:
These documents will then be summarised into the financial statement and presented to the business owners to aid the upper management to make important decisions for the business and controlling assets
Cash Flow Financial Reports
This report shows the detailed information on how and where the cash of a business is being used. There can be different types of cash flow used to run the daily operation depending on the nature of the business.
Financial statements act as communication data as they are shared throughout the whole business and are being reviewed to provide financial decisions and analysis by the accounting department for the business.
Known as a “statement of financial position”, a balance sheet is designed to reflect the value of a company or organisation. The balance sheet reveals the company’s assets, liabilities, as well as the owners’ equity (net worth) as of a particular date and it goes with two other key financial statements, income statement and a statement of cash flow.
A balance sheet is split into two portions and ensures both sides are equal, with this main formula:
In other words, the company’s assets, or the means to operate the business, are balanced by the business’s financial obligations and equity investment brought into the business and its retained earnings.
Statement of Comprehensive Income
This is also known as the Profit & Loss statement. They reflect the company’s revenue for the year based on:
After which, after all the amount has been consolidated, profit or loss is determined by the formula:
Revenue – Cost of Sales = Gross Profit
What are the Key Terms Found in a Financial Statement?
The terms listed below are some of the most common terms being mentioned and used while preparing and analysing the different financial statements!
Assets are items that your company owns, consisting of financial assets, current assets, fixed assets, and intangible assets.
Financial assets include:
Fixed assets include:
Intangible assets are identifiable non-monetary assets without physical substance which includes computer software, licenses, and patents etc.
Liabilities are items that your company owes to the other party, consisting of long-term and short-term liabilities. Liabilities are usually recorded as follows:
4. Income & Expenses
Income and expenses are reflected on the Profit & Loss statement of a business over a period of time. For most businesses, the source of income is derived from the sales of goods and services as well as other additional income such as:
They are to be disclosed separately under ‘other income’ in the P&L statement. On the other hand, expenses are costs a business have to incur to generate income for the company. These include:
5. Cash flows
Cash flows refer to the movement of the money flowing in and out of the business and are categorised into 3 different types namely:
How to Prepare a Financial Statement
Financial statements are documents that have to be filed as a part of preparing a company’s annual returns. It should include all transactions that affected the equity of the company during the period in question.
The purpose of annual returns is to give any potential partners, creditors, or investors a clear view of the profitability of the business, and it also allows them to make informative decisions, planning and budgeting for the business’s future financial years.
Examples of the transactions which are usually included are dividends, owner’s investments, and mergers. On top of that, all transactions typically include explanatory notes alongside them.
Limited Liability Company needs to be audited in case it falls under one of the criteria:
- The company’s business activities are to collect and manage funds from people
- The company issued a promissory note to the public
- The company is a Public Listed company
- The company assets and/or its revenue are at least RP.50.000.000.000
A PT and a PT PMA may take as quick as 30 days to set up and a representative office takes about 6 to 8 weeks to do so. However, the process may take longer depending on the region and completeness of your documents.
According to the latest changes laid out in Job Creation Law, the classification of Local PT in Indonesia based on paid-up capital as follows:
- A micro-enterprise: less than IDR 1 billion
- A small enterprise: IDR 1 – 5 billion
- A medium enterprise: IDR 5-10 billion
- A large enterprise: more than IDR 10 billion
- PMA’s paid-up capital: A foreigner needs to show at least IDR 10 billion in their investment plan with a minimum paid-up capital of IDR 10 billion.
Basically, there are three common types of legal entity you should consider: local company (PT), foreign company (PT PMA) and representative office.