Financial Statement – Income Statement and Balance Sheet

Introduction to the Financial Statement

A financial statement reflects the performance and conditions of a business. The Income Statement and the Balance Sheet are the two major financial statements. The other financial statements are the Statement of Cash Flows and Statement of Changes in Shareholders’ Equity.

The Income Statement and the Balance Sheet are useful in their own ways. The former tells us is the revenues and expenses of a firm related to a specific time period. The latter shows us the financial status of the business at a point in time. The following table tells us more about the differences between these financial statements:

The Differences between the Income Statement and the Balance Sheet

Income Statement Balance Sheet
What it tells us How much did a business earn in a particular period (e.g. in a year) How much has a business accumulated over the years
Example (in layman terms) In 2014, the business got $1,000 in revenue, $700 in expenses and has net income of $300 (difference of the two) On 31 December, 2014, the business has accumulated $200 in assets, $800 liabilities and $1,200 in shareholders’ equity (Shareholders’ Equity = Assets – Liabilities)
Nature An account (presented as a statement) A list of accounts
Examples of components Revenue:

  • Sales revenue
  • Other income

Expenses:

  • Cost of goods sold
  • Administrative expenses
  • Selling and distribution expenses
  • Finance cost

Net Income

Assets

  • Non-current assets (plant and machinery, motor vehicles etc.)
  • Current assets (inventory, accounts receivables, cash etc.)

Liabilities

  • Non-current liabilities (long-term loans, debentures etc.)
  • Current liabilities (accounts payable, bank overdraft etc.)

Shareholders’ Equity

  • Paid-in capital
  • Retained earnings

 

The above is just a brief overview of the Income Statement and the Balance Sheet. In the following articles, you will learn how accountants record transactions so that they can compile these financial statements at the end of each accounting period. You can also find a more detailed explanation of the Income Statement and Balance Sheet later in this series.

 

References

Horngren, C., Sundem, G., Elliott, J., & Philbrick, D. (2014). Introduction to Financial Accounting (Eleventh ed., p. 9, 56).

 

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