unit 7 financial records and Financial Statements

What is the difference between a balance sheet and an income statement?

A balance sheet reports assets, liabilities, and owner's equity as of a specific date. An income statement reports sales, expenses, and net profit or loss for a specified time period.

Income statement

A report of revenue, expenses, and net income or loss from operations for a specific period.

Records of accounts

An accounts receivable record identifies customers that made purchases using credit and the status of each account.

The income statement

An income statement usually covers six months or a year, but may also encompass a shorter period such as a month. Revenue is all income received by the business during the period. Sources of income include the sale of products and services, plus interest earned from investments.

Asset records

Asset records identify the buildings and equipment owned by the business, their original and current value, and the amount owed if money was borrowed to purchase the assets.

Cash records

Cash records list all cash received and spent by the business

The left side of the balance sheet lists all assets. Assets are anything of value owned by the business. There are two common divisions of assets.

Current assets include cash and those items that can be readily converted to cash such as inventory and accounts receivable

Depreciation records

Depreciation records identify the amount assets have decreased in value due to their age and use.

The income statement

Expenses are all of the costs of operating the business during the period. Expenses include things such as rent, supplies, inventory, payroll, and utilities. The business has net income when revenue is greater than expenses. A net loss occurs when expenses are greater than income.

Financial records

Financial documents that are used to record and analyze the financial performance of a business.

Inventory records

Inventory records identify the type and quantity of resources and products on hand along with the current value of each.

Finally, owner's equity is the value of the business after liabilities are subtracted from assets

It shows how much the business is worth on the date the balance sheet is prepared. Another way of looking at owner's equity is that it shows the value of the investments owners have made in the business.

The right side of the balance sheet is divided into two categories

Liabilities are amounts owed by the business to others. As with assets, there are two types of liabilities. Current liabilities are those that will be paid within a year.

The balance sheet

Long term liabilities are debts that will continue for longer than a year. Current liabilities include payments owed to banks and other financial institutions for short-term loans. Also included are payments due to suppliers for inventory purchases, supplies, and inexpensive equipment. Long-term liabilities are debts owed for land, buildings, and expensive equipment

The balance sheet The balance sheet

Long-term assets (also known as fixed assets) are the assets with a life span of more than a year. Common fixed assets are land, buildings, equipment, and expensive technology.

How has the process of maintaining financial records been affected by technology?

Most financial information is collected using point-of-production and point-of-sale technology and sent electronically to the people who prepare the financial records. Also, businesses use computerized financial systems that complete the necessary mathematical calculations and compare those records with budgets. The software can even complete what-if comparisons to help managers determine the impact of changes in budgets and financial performance

Maintaining financial records

Much of the information is now collected using point-of-production and point-of-sale technology such as scanners, touch screens, and personal digital assistants (PDAs).

Payroll records

Payroll records contain information on all employees of the company, their compensation, and benefits

Records of accounts

Records of accounts identify all purchases and sales made using credit. An accounts payable record identifies the companies from which credit purchases were made and the amounts purchased, paid, and owed.

Tax records

Tax records show all taxes collected, owed, and paid.

Maintaining financial records

Technology is changing the way financial information is collected, prepared and maintained.

The balance sheet

The balance sheet is often prepared every six months or once a year. The assets, liabilities, and owner's equity for a specific date are listed on the balance sheet.

Owner's equity

The value of the business after liabilities are subtracted from assets; the value of the owner's investment in the business.

Liabilities

What a company owes.

Balance sheet

- A report that lists a company's assets, liabilities, and owner's equity at a specific point in time

Assets

- What a company owns; anything of value owned by a business