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Financial Statements are summary accounting reports prepared periodically to inform the owner, creditors, and other interested parties as to the financial condition and operating results of the business. The Balance Sheet, Income Statement, and Capital Statement are three of the common formal financial reports prepared by a business. You can think of the financial statements as a business's report cards.
A Balance Sheet is simply a picture of a business at a specific point in time, usually the end of the month or year. It shows the amount and nature of a business's assets, liabilities, and owner's equity. It is also known as a Statement Of Financial Position or a Statement Of Financial Condition.
By analyzing and reviewing this financial statement the current financial 'health' of a business can be determined.
The balance sheet is derived from our accounting equation and is a formal representation of our equation, Assets = Liabilities + Owner's Equity. The categories and format of the Balance Sheet are based on what are called Generally Accepted Accounting Principles (GAAP). These principles are the rules established so that every business prepares their financial statements the same way.
All Balance Sheets contain the same categories of Assets, Liabilities, and Owner's Equity. Assets are listed based on how quickly they can be converted into cash which is called liquidity. In other words, they're ranked. The asset most easily converted into cash is listed first followed by the next easiest and so on. Of course since cash is already cash it's the first asset listed. Liabilities are listed in the order of how soon they have to be paid. In other words, the liabilities that need to be paid first are also listed first.
The Owner's Equity Section has diffrent categories based on the type of business organizations, such as a sole propritorship, partnership, or corporation.
The Balance Sheet has two formats or types of presentation. The Account Form and the Report Form. In the account form the major categories are presented side by side. In the report form the major categories are stacked on top of each other.
The Income Statement is a formal financial statement that summarizes a company's operations (revenues and expenses) for a specific period of time usually a month or year. This statement is also called a Profit and Loss Statement or an Operating Statement. The categories and formats of the Income Statement also follow the rules known as Generally Accepted Accounting Principles (GAAP) and contains specific revenue and expense categories.
The twelve month period that a yearly income statement covers is called a fiscal year. A large number of businesses use the calendar year January thru December as their fiscal year but a business can elect a different fiscal year such as June thru May.
Hopefully a business earns a profit called net income which occurs when revenues are larger than expenses. If however, expenses are larger than revenues a net loss results.
The major sections of an income statement are the heading, the revenue section, the expense section, and the final calculation of a profit or loss. The heading should contain the name of the company, the title of the statement, and the period covered by the statement. Businesses that are retailers, wholesalers, or manufacturers have a special section included in their income statement called Cost Of Goods Sold. This section computes the Cost Of The Goods Sold that were either purchased and sold or manufactured and sold. In retailing and wholesaling, computing the cost of goods sold during the accounting period involves beginning and ending inventories. In manufacturing it involves finished-goods inventories, raw materials inventories, and goods-in-process inventories.
The Capital Statement is the financial report that summarizes all the changes in owner's equity that occurred during a specific period.