book keeping

Financial Statements for Business Accounting

The overall financial picture of a company can be shown by a series of standard bookkeeping statements. Normally created in a financial software program or office program these statements include a balance sheet, an income statement, a capitol statement and a statement of changes in financial position.

Balance Sheet

A balance sheet is a financial snapshot, usually in spreadsheet form, of the financial situation of a business at a fixed point in time. A standard balance sheet would show assets, liabilities and net worth.

  • Assets – items of value owned by a business which could be converted to cash.
  • Liabilities – a financial obligation or debt.
  • Net Worth – amount equal to total assets minus total liabilities.

Income Statement

An income statement, also known as a profit and loss statement is used to show the net profit or loss for an accounting period based on gross income and expenses.

  • Net Profit – amount left after subtracting total expenses from total revenue.
  • Gross Income – amount (before taxes) equal to the net sales minus the cost of sales.
  • Expenses – any cost accrued in the process of doing business.

Some Standard Formulas used on an income statement

  • Gross Margin = gross profit divided by revenue
  • R&D to Sales = R&D expense divided by revenue
  • Operating Margin = operating income divided by revenue
  • Net Profit Margin = net income (after taxes) divided by revenue
  • Return on Equity = net profit divided by average shareholder equity for the accounting period
  • Asset Turnover = revenue divided by average assets for the accounting period

Capital Statement

The capital statement is a report showing the change in owner capital over a specific accounting period.

Statement of Changes in Financial Position

This statement reports on the uses of working capital during the specified time period.

Other statements which are used in accounting procedures are the Cash-Flow statement and the Statement of Retained earnings. Keeping accurate records provides a company with the ability to show their profits and losses for specific accounting period, created quarterly or yearly reports or tax returns and make important decisions throughout the year based on income and expenses.