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Financial Statements
The Income Statement
The Income Statement displays whether or not the business earned a profit. A business earns a net income (profit) if revenues exceed expenses. However, if expenses exceed revenues, the company actually incurs a net loss.
Revenues are inflows of assets (generally cash) generated through providing goods or services. An example of a revenue would be receiving cash for a service that your business provides.
Expenses are costs incurred by business in daily operation. An example of an expense would be the costs associated with heating your office space.
The Balance Sheet
The Balance Sheet provides information concerning a company's current financial status. The Balance Sheet is also referred to as the statement of financial position. It is comprised of 3 sections, including assets, liabilities, and owner's equity.
Assets are items owned by the business that are expected to be of benefit (good for the business).
Examples:
Cash Prepaid Rent Automobiles
Accounts Receivable Land Machinery Supplies
Equipment Law Library
Liabilities are the debts incurred by a business. Liabilities normally require some future payment in assets and/or services.
Examples:
Accounts Payable Notes Payable
Unearned Fees Salaries Payable
Owner's equity refers to the amount left over (difference) after liabilities are deducted from assets.
Assets are related to liabilities and owner's equity according to the following equation:
ASSETS = LIABILITIES + OWNER'S EQUITY
("ALOE")
Statement of Changes in Owner's Equity
The Statement of Changes in Owner's Equity shows the change in equity over a given period of time. Specifically, it displays how owner's equity was increased and decreased as a result of investments and withdrawals during that period.
Summary
To illustrate further the financial statements above, examine Table 3 of the Financials Example.