Financial Statements
In order to manage your business effectively you need reports that tell
you how your business is performing. For example, you may want to know the
value of your assets like, Cash you have on hand,
Cash in bank, and Inventory in stock. In addition, you would like to
know the value of your liabilities, loans, income earned, and expenses
incurred. Accountants prepare financial statements that summarize these
transactions. Two of the most important reports for managing your business are
Income Statement and the Balance Sheet.
Income Statement
An
Income Statement is also called a Profit and Loss Report. In addition, the word
Revenue is often used in place of the word Income. An Income Statement is used
to inform you about the income earned, expenses incurred, and the total profit
or loss in a particular period. Two common periods for creating an income
statement are monthly and annually.
This
report summarizes all Income (or sales), the amounts that have been or will be
received from customers for goods delivered or services rendered to them, and
all expenses, the costs that have arisen in generating revenues. To show the
actual profit or loss of a company, the expenses are subtracted from the
revenues to show the Net Income – profit or the “bottom line”.
Income
Accounts: These accounts are used to track income
earned during the process of operating your business. The income of a business
comes from sales to customers or fees for services or both. Some of the common names
for income accounts are:
• Income from Sales
• Income from Freight
• Other Income
Expense
Accounts: These accounts are used to track
expenses incurred during the process of operating your business. Expenses
include both the costs directly associated with creating products and general
operating expenses. Some of the common names for expense accounts are:
• Cost of Sales
• Office Supplies
• Utilities
Payroll Expenses • Tax Expenses A very simple form of
an income statement displays in the following example:
Income Statement
Income I
ncome from Sales 15,000.00
Income from Freight 1,000.00
Other Income 250.00
Total Income 16,250.00
Expenses
Cost of Sales 2,000.00
Office Supplies 250.00
Telephone Expense 500.00
Utilities 100.00
Consulting Fees 750.00
Maintenance 300.00
Insurance 250.00
Miscellaneous Expenses 375.00
Travel & Entertainment 650.00
Bank Charges 25.00
Payroll Expense 4,000.00
Tax Expense 2,500.00
Total Expenses 11,700.00
Net Income/Loss 4,550.00
Balance Sheet
A
Balance sheet is like a “snapshot” that gives you the overall picture of the
financial health of a company at one moment in time. This report lists the
assets, liabilities, and owner’s equity in the business. Unlike the income
statement, this report is always created to show the financial status as of a
certain date. Two common ending periods to create a balance sheet are the end
of a month and the end of the year.
The
Balance Sheet has two sections. The first section lists all the Asset accounts
and their balances. At the end of the list, the totals of all assets are
listed. In the second section, the Liability and Owner’s Equity accounts are
listed. There are two sub-totals for the Liability and the Equity accounts. At
the end, there is a combined total of the Liabilities and Owner’s Equity. As
discussed earlier in the accounting equation, the Assets equal the sum of the
Liabilities and the Equities. You will also notice that the Profit from the
income statement is listed in the Equity section of the balance sheet. Some of
the important accounts in the balance sheet are:
Current
Assets: Current assets are always listed first and
include cash and other items that can be converted into cash within the following
year. This includes funds in checking and savings accounts.
Accounts
Receivable: Accounts Receivable represents money
owed to the business. These usually result from the sale of merchandise or
performance of services for a client on account. The phrase On Account indicates
that on the date the goods were sold to the client, or the service performed
for him, the business did not receive full payment. However, it did obtain an
asset – the right to collect payment for merchandise sold or Services performed.
The claim a business has against a credit client is referred to as an Account
Receivable. It is an asset because it represents a legal claim to cash.
Inventory:
Inventories may represent merchandise purchased for resale as well as the raw
materials acquired by a manufacturing firm to put into the product. In the case
of a manufacturer, the term inventories also includes manufacturing supplies,
purchased parts, the work that is in process, and finished goods. Inventory is
also an asset account.
Accounts
Payable: When you purchase goods or services on
account, you are usually required to pay within a fixed period of time. These
amounts you owe for the goods or services purchased are called accounts
payable. The payment of these purchases is usually due within a relatively
short period of time. Usually this period is one year or less. Typical periods
are thirty to sixty days. The payment for these short-term liabilities requires
the use of existing resources like the Cash or The Checking Account.
A very simple form of a balance sheet displays in the
following example:
Balance Sheet
Assets
Checking Account 25,000.00
Investments 75,000.00
Inventory 25,000.00
Accounts Receivable 10,000.00
Machinery & Equipment 22,500.00
Investments 100,000.00
Total Assets 257,500.00
Liabilities & Equity
Accounts Payable 15,000.00
Loans Payable 60,450.00
Salaries Payable 75,000.00
Taxes Payable 2,500.00
Total Liabilities 152,950.00
Owner’s Equity 100,000.00
Profit/Loss 4,550.00
Total Equity 104,550.00
Total Liabilities & Equity 257,500.00
This
program automatically creates the Balance Sheet and the Income Statements for
you. All the accounts are automatically updated when you create invoices,
checks, and transactions in the system. To create a Balance Sheet or an Income
Statement all you have to do is to select the report from the menu and print
it.
Linking the Income and Balance Sheet
Generally,
a balance sheet and an income statement are prepared and issued together
because in a way they are twin reports, the income statement showing what
happened over a period of time and the balance sheet showing the resulting
condition at the end of that period.
Since these statements are usually studied in relation
to one another, it is highly desirable for them to tie together with one common
figure. You will see that the Net Profit/Loss on the bottom of the income
statement discussed earlier was $4,550.00. If you look at the Equity section of
the balance sheet shown earlier, you will notice that the $4,550.00 Profit/Loss
lists as a part of the total equity. This ties the income statement to the
balance sheet report.
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