It's not the flashiest part of running a small business, but analyzing the financial data from your small business on a regular basis is vital to the health of your company. Maintaining the proper financial statements helps you determine your business’ financial position at a specific point in time and over a specified period. Show
Information from your accounting journal and your general ledger is used in the preparation of your business’s financial statement. The income statement, the statement of retained earnings, the balance sheet, and the statement of cash flows all make up your financial statements. Also, information from the previous statement is used to develop the next one. Key Takeaways
Income StatementThe income statement, also known as a profit and loss statement, is important because it shows the overall profitability of your company for the time period in question. Information on sales revenue and expenses from both your accounting journals and the general ledger are used to prepare the income statement. It shows revenue from primary income sources, such as sales of the company's products, and secondary sources, like if the company sublets a portion of its business premises. NoteThe income statement also shows any revenue during the time period in question from assets, such as gains on sales of equipment or interest income. The income statement also shows the business's expenses for the time period, including its primary expenses, expenses from secondary activities, and, finally, losses from any activity, including current depreciation. One thing to note about the depreciation shown on the income statement is that it only accounts for depreciation over the time period in question, not the total depreciation of an item from the time the asset was acquired. The bottom line of the income statement is net income or profit. Net income is either retained by the firm for growth or paid out as dividends to the firm's owners and investors, depending on the company's dividend policy. Statement of Retained EarningsThe statement of retained earnings is the second financial statement you must prepare in the accounting cycle. Net profit or loss must be calculated before the statement of retained earnings can be prepared. After you arrive at your profit or loss figure from the income statement, you can prepare this statement to see what your total retained earnings are to date and how much you’ll pay out to your investors in dividends, if any. This statement shows the distribution of profits that are retained by the company and which are distributed as dividends. As the name suggests, the amount of retained earnings is the profit retained by the firm for growth, as distinguished from earnings that are distributed to shareholders as dividends or to other investors as the distributed share of profits. Balance SheetNo financial statement would be possible without the balance sheet. The balance sheet is the financial statement that tracks the firm's financial position at a given point in time, typically the last day of the accounting cycle. It’s a statement showing what your business owns (assets) and what it owes (liabilities). Your assets must equal your liabilities plus your equity or owner's investment. You have used your liabilities and equity to purchase your assets. The balance sheet shows your firm's financial position with regard to assets and liabilities/equity at a set point in time. Entries on a balance sheet come from the general ledger, and the format mirrors the accounting equation. Assets, liabilities, and owners' equity on the last day of the accounting cycle are stated. NoteThe general ledger is the centerpiece of your accounting system—every financial transaction your firm undertakes is recorded in chronological order via debits and credits, Entries on a balance sheet come from the general ledger, and the format mirrors the accounting equation. Assets, liabilities, and owners' equity on the last day of the accounting cycle are stated. A note about depreciation: In contrast to the depreciation shown on the income statement, the depreciation shown on the balance sheet -- which is a snapshot of the company at the end of the accounting cycle -- is the total accumulated depreciation from the day the item was acquired to the present. Statement of Cash FlowsEven if your company is turning a profit, it may be falling short because you don't have adequate cash flow. The cash flow statement compares two time periods of financial data and shows how cash has changed in the revenue, expense, asset, liability, and equity accounts during these time periods. The statement of cash flows must be prepared last because it takes information from all three previously prepared financial statements. The statement divides the cash flows into operating cash flows, investment cash flows, and financing cash flows. The final result is the net change in cash flows for a particular time period and gives the owner a very comprehensive picture of the cash position of the firm. The statement of cash flows shows the firm’s financial position on a cash basis rather than an accrual basis. The cash basis provides a record of revenue actually received, from the firm's customers in most cases. The accrual basis shows and records the revenue when it was earned. If a firm has extended billing terms, such as 30 days net, 60 days 1 percent, these two methods can produce substantially different results. Frequently Asked Questions (FAQs)What are retained earnings?Retained earnings refers to the net profit of a company after it makes its dividend and other shareholder payments—earnings which are, therefore, "retained" by the company. What goes into a financial statement?Financial statements are summary-level documents that provide details about a company's financial position at a given point in time. Typically a balance sheet, cash-flow statement, and income or profit and loss statement are included. What financial statement shows the bottom line?The bottom line is a company's net income, or the "bottom" figure on a company's income statement. More specifically, the bottom line is a company's income after all expenses have been deducted from revenues. These expenses include interest charges paid on loans, general and administrative costs, and income taxes.
Is the line at the bottom of a financial report showing profit or loss?The bottom line in business refers to a business's net income, net earnings, or net profit. It is referred to as the bottom line as it is found at the bottom of the net income financial statement. The bottom line is calculated by deducting expenses from revenues.
What information is found at the bottom of the profit and loss statement?Your net income is included at the bottom of a P&L statement. It's what's left after you subtract your expenses from your revenue. If your net income shows that you earned a profit, your business is making more than it spends.
Is the balance sheet the bottom line?The balance sheet shows the company's financial position, what it owns (assets) and what it owes (liabilities and net worth). The "bottom line" of a balance sheet must always balance (i.e. assets = liabilities + net worth).
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Which financial statement shows a firms bottom line its profit or loss after costs expenses and taxes for a specific period?
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