To develop a set of financial statements you have to start with an outline of how you will organize the information. This outline is called your chart of accounts, and it is the framework upon which the financial statements are built. Every category of income, expense, cash, assets, debts, and owner's equity in your company is assigned to an account in your chart of accounts.

Every transaction in your business (sales invoices, cash receipts, vendor invoices, etc.) will be distributed as debits and credits to appropriate accounts in the chart. Each account will have summary totals of debits and credits posted each accounting period. T

he financial health of your business can then be determined with the financial statements that will result from these categorized totals. You need a chart of accounts whether you are doing bookkeeping by hand or using a computer - this system predates computers.

A chart of accounts uses a numbering system to organize the data. All the data on all the reports you print comes out in numerical order. The first digit of each shows what sort of account it is, and the digits, which follow, put the accounts in order. [Turn it up a notch...]

A standard chart of accounts for your business is provided with MyBooks. You may, however, add or delete from the list.

The Financial Statements: Financial statements come as a pair: a balance sheet and an income statement. These are really two ways of looking at generally the same information.

The Income Statement (also called profit and loss statement or P&L) tells you how much money you've made (or lost!) in a period of time, which you can specify (this month, this quarter, this year).

The Balance Sheet tells you where your business stands as of the date you specify. How much cash you have, the value of your tools, how much you owe, on a given day. Although there is an early tendency to want to see the income statement and ignore the balance sheet, you need to use both together to see all of the facts. This is exactly what your accountant does.

A third, and very useful report is the Cash Flow Statement. This statement shows the flow of cash into and out of a business for a period of time. It will help answer the guestion of "where did the money go?" by reporting activities that have a direct effect on cash.