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Sunday, August 9, 2009

The Financial Statement

Balance Sheet
Balance sheet shows the assets and liabilities of the concern. The difference between the two is the entity.

Generally, assets are listed on the left side of the page where as the liabilities and equity are listed on the right side of the balance sheet. This is significant in understanding debits and credits. Liabilities and equity are always shown together which mean that if liabilities are greater than assets, then equity is negative.

The main features and objectives of balance is to show the financial position of the concern at a specific time period say in fiscal year or financial year.

Income Statement
Income statement shows the revenues and expenses of the company. the difference between the two is net income.

Revenues and expenses are self explanatory. Many income statements just show those two categories with net income at the bottom. However, many situations call for a further breakdown.

Those companies who are dealing with buy and sell inventory need to know gross profit. To do this expenses are broken into two parts: Costs of goods sold and Operating Expenses.
Assume: A furniture store sells $20,000 worth of furniture. It banks $40,000. Expenses other than the cost of the furniture was $15,000. The Income Statement would look like this: Revenue $40,000
Cost of Goods Sold $20,000
Gross Profit $20,000
Operating Expenses $15,000
Net Income $ 5,000
Here, companies have costs that are not operating costs. Costs from discontinued operations, gains and losses from sale of assets are examples of non-operating amounts.

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