How Do I Prepare an Income Statement & a Balance Sheet in Financial Accounting?
Running your business successfully encompasses many aspects beyond just what services or products you offer. One of those additional aspects is keeping tabs on your financial status. Two special accounting reports help you do just that. One is the Balance Sheet, a listing of all your company's assets and liabilities on a specific date. The other is the Income Statement (sometimes called a Profit and Loss Statement), which shows you the income and expenses for your company over a specified period of time. These two reports help you know how profitable your business really is.
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Things You'll Need
- Invoices or other income source documents
- Receipts for business expenses and major equipment purchases
- Bank statements
- Credit card statements
- Loan documents
Instructions
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The Balance Sheet
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1
List the reconciled balances of all of your companies' assets--those things your company owns, such as cash and investments, buildings, equipment, inventory and intangibles, such as goodwill--on a given date, such as December 31. Reconciled totals should be used for cash and investment accounts. Purchase costs should be used for inventory, buildings and equipment, as well as intangible assets.
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List the reconciled balances of your liabilities--those things your company owes. These might include Accounts Payable to vendors, credit card balances and other loan balances, such as for equipment or company vehicles.
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3
Subtract your Liabilities (what your company owes) from your Assets (what your company owns) to determine Owner's Equity. The Owner's Equity section of the Balance Sheet shows the true picture of what your company is worth.
The Income Statement
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4
Enter all your income information from your appropriate source documents. These might include your Accounts Receivable invoices or deposit slips for your bank account. Most businesses are cash-basis, meaning that they report income when actually received and expenses when actually paid. If your business is accrual-based, you will need to report your income when it is earned, not when it is received, and your expenses when incurred, not when paid. For more information on cash-basis vs. accrual-basis, please consult an accountant or licensed tax professional.
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Report Cost of Goods Sold on your Income Statement if you are a retail, wholesale or manufacturing business. If you are a service-based business, this does not apply. Cost of Goods Sold refers to the cost of the merchandise that you were holding in inventory or in works-in-progress, but which you have now sold. It removes the cost from your inventory and shows it applicable to the income you earned from its sale.
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Record all your expenses, categorizing them as appropriate, from your source documents, such as receipts. Business categories vary by the type of business involved, but most include such things as office supplies, salaries, business meals and travel, and advertising.
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Subtract your Total Expenses from your Total Income. The difference reveals your profit or loss for the period in question. A positive number shows that you have a profit. A negative number shows that you have incurred a loss for that period of time.
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Tips & Warnings
Make certain your balances and totals entered reflect true and reconciled amounts, in order to ensure the credibility of your reports. Also, please note that certain types of expenses may or may not be income tax-deductible, so your reports' total may be different for tax purposes than for your financial reporting purposes.
References
- Photo Credit profit with mobile phone image by Kirubeshwaran from Fotolia.com
