How to Prepare Balance Sheet and Income Statement
Are you new in your business and you would like to know how to prepare balance sheet and income statement?
Preparing balance sheet and income statement is a usual task for every business owners so if you want to be familiar for this assignment so stick on this article as we relay to you the basics for your preparation.
The Importance of Preparing Balance Sheet and Income Statement
Understanding the importance of preparing balance sheet and income statement is very essential to every business. The balance sheet and income statement are the tools in determining if the business is growing continuously or not earning anymore due to certain losses. The two are generally linked to each other and if combined will give you an exact overview of status of your business within a specific period of time, which is generally called as cash flow statement.
The Balance Sheet
Let’s familiarize each one of them. The balance sheet is the overview of the total assets and liabilities of the entity plus the owner’s equity. Assets are recognized as the items owned by the company. These items are any resources or properties of the company in the form of cash, accounts receivable, inventory, and fixed assets like office equipment which mostly depreciated over time. The cash is simply the cash on hand which mainly used for daily transactions and used also during emergencies. Accounts receivable are the total amount of money owed by the customers if the business extends credit while inventory are the products or services for sale. Fixed assets include the equipments, vehicles, and even the building owned by the company.
On the other hand, liabilities are the total debt that entity or business owed to its creditors or any lending institutions. It includes accounts payable (the amount owed to the suppliers), and long-term bank loans. Usually, these are projected to be paid within a year. In addition, the equity is the owner’s capital or share itself. The difference between the total assets and liabilities is equals to the total equity.
The Income Statement
The income statement is the summary or an outline of the total revenues generated by the business subtracted by the total expenses. The sources of revenue can be generated if the company manufactures or resells products or if the company generates revenue through services and fees. For the expenses, it is best describes as the total amount used in paying the salaries of the employees, for the utilities, paid for the rents, insurances, taxes, and office supplies. Now, the difference between the two will show either the net profit or the net loss. If the total revenue is greater than the total expenses then the company gain a net profit; however in contrast it will show a net loss since the company is spending more than it is gaining. Familiarizing the balance sheet and the income statement is really very important in the decision-making if the business should be continued or stop.