This podcast discusses the benefits of looking at your financial statements. Financial statements summarize a certain time period of your business and show you information about your business’s health. You can see how much your business earns, spends and where that money goes.
WHAT ARE FINANCIAL STATEMENTS AND WHAT DO THEY TELL ME?
- Financial statements show you a lot about your company. They summarize a certain time period of your business and show you information about your business’s health. You can see how much your business earns, spends and where that money goes.
WHAT TYPE OF FINANCIAL STATEMENT ARE THERE?
- There are 3 main types of financial statements: The income statement a/k/a Profit and loss, the balance sheet and Cash Flow Statement. We will only be talking about the Profit & Loss and Balance Sheet today.
- You also track your Financial Statements by cash basis or accrual basis
WHAT IS THE DIFFERENCE BETWEEN CASH AND ACCRUAL?
- Cash basis financial statements track the actual cash that is coming in and going out of your business. If you make a sale and invoice your customer and haven’t received the money yet, that isn’t included in your revenue.
- Accrual basis financial statements track the money that you will be receiving in the future and expenses you will be paying in the future. Also known as Accounts Receivable and Accounts Payable. When you make a sale and invoice a customer, that money is included in revenue. When you receive a bill from a vendor, that cost is included in your expenses and deducted from revenue
- Accrual basis is a better “match” of revenue and expenses
CAN YOU TELL ME WHAT THE INCOME STATEMENT INCLUDES?
- An income statement is a summary of your business’s profits and losses over a time period. This measures the profitability of your business. You can see which products and services are making you money and what expenses you may be able to reduce.
- The first section of the income statement is your revenues – how much you are making through your sales.
- The second section is Cost of Goods Sold, this is the cost of producing your goods or performing services. It included raw materials and direct labor.
- Next is your Expense section. You may have operating expenses, selling expenses, etc. These are your overhead costs and include things like rent, office expenses, advertising.
- The last section is other income and other expenses. This is income and expenses that are not part of your normal business activities, like Interest Income or tax expenses
- Your Income minus COGS, minus expenses, plus other income, minus other expenses equals your net income or net loss. This is what is reported on your tax return.
AND THE BALANCE SHEET, WHAT DOES THAT TELL ME?
- A balance sheet summarizes your business assets (what you own), liabilities (what you owe) and equity (what is left over after your pay expenses) for a specific point in time.
- A balance sheet shows your company’s net worth.
- The first section of your balance sheet are your assets.
- There are current assets which are most liquid, meaning you can turn them into cash within a year. Cash, accounts receivable and inventory.
- Next are fixed assets. These are property and equipment and things that would take longer to turn into cash
- The next section of your balance sheet are your liabilities.
- Similar to assets, there are current liabilities which are amounts owed within a year. Examples are accounts payable and short-term debt, like a credit card.
- Then there are long term liabilities, like loans, that you have to pay back over several years.
- The last section is your equity – what’s left over.
- The “Accountant’s Law”: Assets – Liabilities = Equity
- Equity represents ownership, money you’ve invested as the owner, draws that you’ve taken (cash you’ve taken out of the business), what your business has earned/lost in prior years and what is has earned this year.
Be sure to talk to one of our professionals if you have any questions about Financial Statements.
I manage tax return preparation, review, and audits for businesses, individuals, and nonprofits. I also handle financial statements and provide accounting and payroll services to various industries. Additionally, I serve on the Firm's Estate and Trust Planning and Community Service Day Committees.
