The statements you\u2019re making your entries into are called balance sheet and income statement. These are the ones that are the most important and the mostly used \u2013 for government officials, investors etc. Importance of those two statements is something we\u2019ll cover in more detail further below, but let it be said that there are two or even three other statements one can present for a company \u2013 statement of cash flows, statement of comprehensive income and statement of changes in owner\u2019s equity. Those are the statements that mostly just form from the main two and are not separate statements you make entries into. These statements come into play when you\u2019re preparing your company\u2019s annual report and you\u2019ve got to present all sorts of detailed information about your company\u2019s results and performance. However let us move now to those two main statements. <\/p>\n
Balance Sheet
\nA show of your assets and liabilities, it\u2019s what the balance sheet is all about. As the name says, it\u2019s a balance and as such it\u2019s where something balances with something else, i.e. your assets must always equal the sum of your liabilities and equity. You can look the balance sheet as two columns \u2013 assets are what your company owns and liabilities alongside with equity are something others (other than the company itself) have invested into your company. How does it always equal? Well, as you recall, all accounting entries have at least two lines \u2013 one debit and one credit and since they are always equal, the balance sheet will always have equal sides. It must balance. On one side you acquire something, but with acquiring until you haven\u2019t given up your other assets, you owe something, which means someone else \u201cinvested\u201d money into your business. Until you haven\u2019t paid up this debt, they are your investors (or creditors). But enough about arithmetic and philosophy, let\u2019s continue with the balance sheet itself.<\/p>\n
On your company\u2019s balance sheet what you do is group similar assets into one category \u2013 i.e. current and non-current assets. The similar grouping should be done with liabilities \u2013 current and non-current liabilities. What\u2019s similar about those? Current means it\u2019s either to be made liquid, meaning you get cash in return (for assets) within next 12 months from the balance sheet date or to be settled (for liabilities) within next 12 months from the balance sheet date. And consequently everything else is non-current meaning they are to be settled (made liquid or paid up) within more than 12 months from the balance sheet date. Yes, as you may have gotten the 12-month period is the key here. What it means literally is within next financial year and hence the split of assets and liabilities. Investors and everyone else reading your reports are interested to know of your liabilities you\u2019ve got to pay up during the next financial year and what have you got in return to settle those debt balances, i.e. your current assets you should be able to collect as cash and obviously cash balances themselves. That\u2019s what the current and non-current balances are all about.<\/p>\n
Obviously, a more detailed balance sheet would include different account numbers and accounts on their own, but if you\u2019re presenting your balance sheet to someone, it\u2019s wise to group similar type of assets into subgroups, like prepaid expenses for an example. You may have separate accounts for prepaid rent, fees, subscriptions etc., but on the not-so-detailed balance sheet they\u2019re all \u201cprepaid expenses\u201d for an example. And it\u2019s the same with liabilities, nothing different here when it comes to showing those balances.<\/p>\n
What a balance sheet in short is, it is a summary of what your company owns on its own and what it owes for what it owns or will own or did own (as liabilities are something that a company can still have even after they\u2019ve already disposed of the asset they acquired). Note here that the balance sheet is always for a specific date \u2013 balance sheet date. This date represents the date when the reporting period ended. It\u2019s the date, when reported together, your income statement should have its period\u2019s ending date. For an example, if your balance sheet date is 30.06.2012 and you\u2019re reporting for the period of 31.12.2011 until 30.06.2012, your income statement is prepared for the period of 31.12.2011 until 30.06.2012.<\/p>\n
Income Statement
\nThe income statement is something that shows your incomes (as the name says) and your expenses just as well. The reason it\u2019s called \u201cincome\u201d statement is because it starts off with your revenues and by taking off all your expenses you made to get to those sales, we\u2019re left with net profit, which is your income. Income in the sense that it\u2019s what you can say you earned.<\/p>\n
Another reason it\u2019s called income statement inevitably comes from the purpose of a company \u2013 making profits, i.e. earning income. It\u2019s to show if and if so how much your company earned during the reporting period the statement is prepared for. Something that\u2019s different when it comes to income statement compared to the balance sheet is the fact that this statement is prepared for a period and not for a specific date. An income statement is for a certain period \u2013 a month, a quarter or a year \u2013 whatever is required and you choose to report. When you present your income statement, do make it a point to present it with a heading that\u2019s for a period and not just the ending date of the said period. It\u2019s such a common mistake to make and yet so easily avoidable.<\/p>\n
Something to also note about the income statement is grouping. Similar types of revenue are always grouped together and so are expenses. You wouldn\u2019t want to show your renting expenses under car fuel expense accounts, would you? Well, you shouldn\u2019t. So what you should do is just show similar transactions grouped under lines which describe the expense the best, i.e. if your company rents cars, buys fuel for them, pays for the insurance and maintenance, why not group them under something called \u201ccar expenses\u201d for an example?<\/p>\n
And it\u2019s not all. When it comes to showing your income statement to those that are interested, you would want to group it more \u2013 group expenses based on their function or nature.<\/p>\n
It\u2019s something we\u2019re explaining in more detail in our course, but very shortly I\u2019ll fill you in. When we talk about grouping expenses based on their function it\u2019s meant so that you group expenses which are made for similar business division, i.e. marketing, production, administration etc. All personnel expenses, depreciation, office expenses made etc. are grouped under which division they are made within. If for an example you have marketing activity, you\u2019ve got people responsible for it, all of their expenses are shown under marketing expenses on the income statement \u2013 payroll, car rent, car fuel, room renting, utilities etc.<\/p>\n
Now, when we talk about grouping expenses by their nature though, it\u2019s like the name says, by their very nature \u2013 personnel costs (payroll, social tax etc.), depreciation, operating expenses etc. You paid salaries, it\u2019s personnel costs and by nature it\u2019s grouped under there.<\/p>\n
And that\u2019s very shortly what the income statement is about. It\u2019s to show all your revenues and all the expenses your company along with all your employees made for those revenues. And obviously what\u2019s left of your revenues after those expenses, i.e. your net profit. Something making a business is all about.<\/p>\n","protected":false},"excerpt":{"rendered":"
The statements you\u2019re making your entries into are called balance sheet and income statement. These are the ones that are the most important and the mostly used \u2013 for government officials, investors etc. Importance of those two statements is something we\u2019ll cover in more detail further below, but let it be said that there are […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[28,46],"tags":[],"class_list":["post-3716","post","type-post","status-publish","format-standard","hentry","category-4-reporting","category-4-1-annual-report"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/3716","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/comments?post=3716"}],"version-history":[{"count":3,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/3716\/revisions"}],"predecessor-version":[{"id":3720,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/3716\/revisions\/3720"}],"wp:attachment":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/media?parent=3716"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/categories?post=3716"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/tags?post=3716"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}