Accounting basics - Lesson 2
An introduction to financial statements...
Financial statements are financial reports generated from a businesses, company's, or other entities, accounting transactions. They usually highlight financial areas such as profitability, what the entity owes, what the entity owns, and business trends.
When someone says "the financial statements", they are usually referring to an entities year end accounts, which contains a profit and loss statement and a balance sheet of the entities financial year.
Being able to create and understand financial statements is a must for all bookkeepers, accountants, tax accountants, cost accountants, financial controllers, and anyone working in finance. You can learn how to create financial statements in my free bookkeeping course and my free management accounts course.
Having the skills to analyse financial statements will make you a real accounting wizard. If you want to be a Dumbledore of accounting, then learning financial analysis is a must. You can learn this in my free financial analysis course.
When someone says "the financial statements", they are usually referring to an entities year end accounts, which contains a profit and loss statement and a balance sheet of the entities financial year.
Being able to create and understand financial statements is a must for all bookkeepers, accountants, tax accountants, cost accountants, financial controllers, and anyone working in finance. You can learn how to create financial statements in my free bookkeeping course and my free management accounts course.
Having the skills to analyse financial statements will make you a real accounting wizard. If you want to be a Dumbledore of accounting, then learning financial analysis is a must. You can learn this in my free financial analysis course.
The profit and loss explained
The profit and loss statement is a financial report that shows the overall profitability of a business or company for a selected period.
Most businesses will create an annual profit and loss statement that covers the financial year of the company, but there is no reason why profit and loss statements cannot be produced more often - large businesses usually generate monthly or quarterly reports, as well as an annual profit and loss statement.
The profit and loss statement states an entities sales and expenses. It also states gross profit and net profit figures.
In laymen's terms, a businesses sales minus it's expenses equal the company's profit or loss.
A loss is usually shown in brackets. For example, a loss of 5,000 would show as (5,000) on the profit and loss statement.
A profit and loss statement can also be called the 'statement of financial operations' or an 'income statement'.
A profit and loss statement can be helpful for so many reasons. Below are some of the main reasons...
1. Profitability. The profit and loss statement states a company's profits (or lack of) for a selected period
2. Taxation. Tax is generally calculated on a company's profits
3. Law. A profit and loss statement is usually required by law, by tax authorities, and company regulators
4. Finance. If a business requires finance, or any form of borrowing, the lender will likely need profit and loss statements
5. Analysis. From a profit and loss statement, a financial analyst (or an expert business owner or super accountant) can identify trends in sales and expenses and calculate various financial information, such as profit margins.
6. Forecasting. A profit and loss statement is crucial when it comes to business planning and forecasting.
Below is a profit and loss statement (P&L) infographic, which I strongly suggest you study...
Most businesses will create an annual profit and loss statement that covers the financial year of the company, but there is no reason why profit and loss statements cannot be produced more often - large businesses usually generate monthly or quarterly reports, as well as an annual profit and loss statement.
The profit and loss statement states an entities sales and expenses. It also states gross profit and net profit figures.
In laymen's terms, a businesses sales minus it's expenses equal the company's profit or loss.
A loss is usually shown in brackets. For example, a loss of 5,000 would show as (5,000) on the profit and loss statement.
A profit and loss statement can also be called the 'statement of financial operations' or an 'income statement'.
A profit and loss statement can be helpful for so many reasons. Below are some of the main reasons...
1. Profitability. The profit and loss statement states a company's profits (or lack of) for a selected period
2. Taxation. Tax is generally calculated on a company's profits
3. Law. A profit and loss statement is usually required by law, by tax authorities, and company regulators
4. Finance. If a business requires finance, or any form of borrowing, the lender will likely need profit and loss statements
5. Analysis. From a profit and loss statement, a financial analyst (or an expert business owner or super accountant) can identify trends in sales and expenses and calculate various financial information, such as profit margins.
6. Forecasting. A profit and loss statement is crucial when it comes to business planning and forecasting.
Below is a profit and loss statement (P&L) infographic, which I strongly suggest you study...
The balance sheet explained
The balance sheet is a financial report that shows the assets, liabilities, and equity of a business, company, or other entity, at a specified date.
In layman's terms, a balance sheet shows what a business owns and what it owes.
The balance sheet can also be called the 'statement of financial position'.
A balance sheet totals a company's assets. It also totals a company's liabilities and equity.
The total value of assets should equal the total value of liabilities and equity, hence the term 'balance' sheet - the totals balance.
A balance sheet can be important for so many reasons. Here are the main reasons...
1. Law. A balance sheet is usually required by law, by tax authorities, and company regulators
2. Finance. If a business requires finance, or any form of borrowing, the lender will likely need balance sheets
3. Analysis. From a balance sheet, a financial analyst (or an expert business owner or super accountant) can identify many things. These includes items like financial trends, company efficiency, company liquidity, valuation, and growth
Below is a balance sheet infographic, which should help with the learning process...
In layman's terms, a balance sheet shows what a business owns and what it owes.
The balance sheet can also be called the 'statement of financial position'.
A balance sheet totals a company's assets. It also totals a company's liabilities and equity.
The total value of assets should equal the total value of liabilities and equity, hence the term 'balance' sheet - the totals balance.
A balance sheet can be important for so many reasons. Here are the main reasons...
1. Law. A balance sheet is usually required by law, by tax authorities, and company regulators
2. Finance. If a business requires finance, or any form of borrowing, the lender will likely need balance sheets
3. Analysis. From a balance sheet, a financial analyst (or an expert business owner or super accountant) can identify many things. These includes items like financial trends, company efficiency, company liquidity, valuation, and growth
Below is a balance sheet infographic, which should help with the learning process...
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