Business documents

The analysis of the transactions complete, what is the next step in the accounting process? How does an accountant present the results of the analysis? We now look at the financial statements. These business documents report financial informa­tion about the entity to persons and organizations outside the business.

The primary financial statements are the (1) balance sheet (2) income state­ment, (3) statement of owner's equity, and (4) statement of cash flow.

The balance sheet lists all the assets, liabilities, and owner's equity at a point in time, usually the end of a month or a year. The balance sheet is like a snapshot of the entity. For this reason, it is also called the statement of financial position. A balance sheet is made up of two lists, placed side by side. On the left the company lists everything it owns, such as cash and ‘fixed assets’ called property, plant, equipment, which include everything from buildings and trucks to tools, pencils, and copy machines. This list is labeled assets. On the other side, the company lists its liabilities, consisting of all the claims to the company’s assets, from creditors and from the company owners. The lists end up being exactly equal – whatever assets are not claimed by the company’s creditors belong to the owners.

MAIN STREET STORE, INC

Balance Sheet

August 31, 20XX

Assets Liabilities and Owners’ Equity

Current assets: Current liabilities:

Cash……………………..34,000 Short-term debt…………20,000

Accounts receivable………80,000 Accounts payable……….35,000

Merchandise inventory……170,000 Other accrued liabilities….12,000

Total current assets…….284,000 Total current

Plant and equipment: liabilities……………67,000

Equipment………………...40,000 Long-term debt……………..50,000

Less: Accumulated Total liabilities……….117,000

Depreciation…………(4000) Owners’ equity………………203,000

Total liabilities and

Total assets ……………….320,000 owners’ equity……………..320,000

The income statement, or profit and loss statement (P&L) measures the performance of an enterprise. It presents a summary of the revenues and expenses of an entity for a specific period of time, such as a month or a year. The income statement, also called the statement of operations, is like a moving picture of the entity's operations during the period. The income statement holds perhaps the most important single piece of information about a business—its net income, which is revenues minus expenses. If expenses exceed revenues, the result is a net loss for the period.

The statement of owner's equity presents a summary of the changes that occurred in the owner's equity of the entity during a specific time period, such as a month or a year. Increases in owner's equity arise from investments by the owner and net income earned during the period. Decreases result from withdrawals by the owner and from a net loss for the period. Net income or net loss comes directly from the income statement. Investments and withdrawals by the owner are capital transactions between the business and its owner, so they do not affect the income statement.

Another tool for understanding a company’s activity is to look at its cash flow. This measures the actual flow of funds – real money—flowing into and out of a company during a given period of time. A company’s cash flow factors out all of the accounting tricks and looks at what a company really earned, because it excludes accounting tools such as depreciation.