Financial statements are one of the most mesmeric document for most entrepreneurs without accounting background. Below is a quick review of both Balance Sheet and the Profit and Loss.
A balance sheet is a financial statement that discloses an entity’s financial status at a given point of time. It has 2 ends that must be able to match with each other, namely the assets as well as equity & liabilities. Out of other section on the chart of account (Also see The Importance of a Chart of Accounts), only these 3 sits in the Balance Sheet.
For assets, it reflects the current and non-current assets of a business. The current assets have higher liquidity that can be converted into cash within one year. It mainly comprised of inventories, trade receivables, bank balances and other highly liquid financial assets. Non-current assets have 2 classifications – the tangible as well as intangible assets. Tangible assets are referring to the business’s physical assets, like a motor vehicle, office equipment, computer, and so forth. The intangible assets are assets that have no physical appearance owned by the business, for instance, trademark, licenses, goodwill, and so forth.
On the equity and liabilities section, it includes the shareholder’s fund, non-current and also current liabilities. Shareholders’ fund contains the share capital, retained earnings and various reserves that the management deemed fit for the company’s growth. Current liabilities are liabilities that need to be settled within 12 months that contains accrued expenses, account payable (Also see What is Accounts Payable?), bank overdraft and other short-term payables. Non-current liabilities are liabilities that ought to be settled after the next 12 months and typically includes debentures, hire purchase creditors and mortgages.
Profit and Loss Account
The profit and loss account, also commonly known as called an income statement. The said statements’ primary objective is to disclose the business’s financial profitability in a given time period.
The gross profit is derived by subtracting the sales from the direct costs. To obtain the net profit, all you need to do is to deduct other expenses like utility bills, telephone bill, rental, upkeep of premises, advertising expenses, depreciation from the gross profit.
In certain circumstances, a company might have other non-core revenue streams such as bank interest from a current account, rental income by subletting part of the office space and gain from disposing of certain unused non-current assets. All these incomes are recorded in the other income section so to distinguish its non-core characteristic.