A financial statement means reports on the activities of a business. These reports are a comprehensive way of communicating financial information to the users.
When the trial balance has been prepared, our immediate task is to prepare the financial statements according to the sequence of accounting procedures. Financial statements include the following reports:
The income statement is a statement in which revenues and expenditures are matched to arrive at a profit or loss figure. Many businesses try to distinguish between a gross profit earned on trading and a net profit after other income and expenses.
In the first part of the income statement (the Trading account), revenue from selling goods is compared with direct costs of acquiring or producing the goods sold to arrive at a gross profit figure.
From the gross profit figure, the deduction is made in the second half of the income statement
(which is called income and expenditures Account) regarding indirect costs and additions for non-trading income. In other words, an income statement is divided into two halves:
i. Gross Profit = Sales – the cost of goods sold
ii. Net Profit = Gross Profit – Expense + Non-Trading Income (Income from other sources)
The income statement explains in depth how a period’s profit or loss was generated.
A balance sheet is a statement of the liabilities, capital, and assets of a business at a given moment in time.
In other words, a balance sheet is a list of assets, liabilities, and capital of a business at some specific point in time. A balance sheet is prepared at the end of the accounting period to which the financial statements relate.
A balance sheet is very similar to the accounting equation. A balance sheet is divided into two halves:
i. Capital and liabilities in one half called “Equity” section and
ii. Assets in the other half
The order of items or elements in the balance sheet:
A balance sheet lists assets, liabilities, and capital in a particular order. This order is not compulsory; however, you should try to get into the habit of using the conventional order of items yourself.
The format most commonly used in the report form balance sheet (or vertical balance sheet format), which lists:
(a) Net assets above and capital below or
(b) Fixed assets and net current assets above, with capital and long term liabilities below or
(c) Assets above and liabilities (including capital below) or
(d) Capital and liabilities above, with assets below.
Note: there is no hard and fast rule about the order of items in the report form (or vertical) balance sheet.
Order of items within categories:
Students should note the following points:
(a) Fixed assets are listed in descending order of “length of useful life.” The building has a longer life than furniture and fixtures, which perhaps have a longer life than motor vehicles. This is a way the fixed assets are listed in the order shown above.
(b) Current assets are listed in descending order of the length of time it might be before the assets are converted into cash. Inventory will convert into accounts receivable, and Account receivable will convert into cash, and so inventory, accounts receivable, and cash will be listed in that order. Because they are similar to Account receivable, prepayments should be listed after Accounts receivable and before cash.
The Distinction between Income Statement and Balance Sheet
Following are the diffrence between in Income statement and Balance sheet:
|Income Statement||Balance Sheet|
|1. It is prepared for an accounting period.||1. It is prepared for the last day of the accounting period.|
|2. It records only incomes and expenses.||2. it records only assets, liabilities and capital|
|3. It shows how the profits are earned or losses are incurred.||3. It shows the financial position of the business.|
|4. The accounts that are transferred to the Income statement are closed.||4. The accounts that are transferred to the balance sheet are not closed.|
|5. The balance(net profit or loss) of this statement is transferred to the capital account in the balance sheet||5. The balances of this statement become the opening balance of the next period.|
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