For any business an income statement and a balance sheet are a must for multiple purposes. These statements show all the interested parties how the business has performed over a period of time. Shareholders want to see these statements because they want to know how much dividend they stand to earn. Creditors want to see these statements because they want to be sure that the money that they have lent has gone to a proper enterprise. Investors want to see these statements because they want to ensure that they are going to get good returns on their investments.
The other name for the income statement is Profit & Loss Statement. It is the financial statement of a company that shows how the top line and the bottom line of the company look like during a specific period. It takes into account all the revenues earned by the organization during a specific period and how the expenses and various costs are charged against the revenue earned. The expenses and costs also include depreciation, amortization and write-offs, if any. The purpose of the P&L statement is to show those avenues through which the company earned money and those avenues where money was spent.
Typically a detailed income statement is prepared using a multi-step process. The gross profit of the company is first calculated by deducting all direct costs from the revenue earned (also referred to as cost of goods sold). The operating expenses of the company are then deducted from the gross profit to arrive at the income from operations. Any other revenue earned is added to this figure and any other cost or expense is then deducted. The calculation now shows income before taxes. The taxes are now deducted and the net income for the period is arrived at.
The balance sheet is prepared to determine the financial position of the business. When viewing a balance sheet, the reader can isolate the financial strengths and financial weaknesses of a company.
A balance sheet is typically prepared at the end of the financial year; although quarterly and semi-annual balance sheets may also be prepared.
This statement has typically three components to it. The first component is the consolidated value of assets. The second component is the consolidated value of liabilities. The third component of the balance sheet is known as equity which is the difference between the assets and the liabilities. When this statement is prepared it has to be kept in mind that the total of liabilities and equities must equal the total of assets.
Both the income statement and the balance sheet show how healthy a company is. There are specific formats for preparing these statements and usually professional accountants do this job. But it is possible to learn how to make these statements and small business owners can save a lot of money by making these statements themselves. There are enough online resources for learning.