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 statements 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 streets store, inc

Balance Sheet

August 31, 20 XX

Assets Liabilities and Owner's Equity

Current assets: Cash………………………..34,000 Accounts receivable ……….80,000 Merchandise inventory…….170,000 Total current assets………...284,000 Plant and equipment: Equipment………………….40,000 Less: Accumulated Depreciation……………....(4000) Total assets……………..…320,000

Current liabilities: Short-term debt……………….20,000 Accounts payable……………..35,000 Other accrued liabilities…........12,000 Total current liabilities……….67,000 Long-term debt……………….50,000 Total liabilities…...………….117,000 Owner’s equity……………....203,000 Total liabilities and 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 а 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.