Week1 Intrepreting Financial Statements.docx - Interpreting Financial Statements Income Statement An income statement is the first financial statement

Week1 Intrepreting Financial Statements.docx - Interpreting...

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Interpreting Financial Statements Income Statement An income statement is the first financial statement that should be completed. The income statement shows how much a company has earned for a specific period, which is called revenue . Revenues are from a service or selling of merchandise. Expenses are the amount that a company must pay to keep the business running, such as utilities and payroll. Revenues are subtracted from expenses, and the result is either a net income or net loss that a company has earned for the period. Statement of Owner's Equity The statement of owner’s equity is the amount that the owner has invested in a company. The amount includes personal investment to the company, as well as either the net income or the net loss. Net loss is subtracted from the owner’s balance. As long as the company has the money, the owner may withdraw funds for personal use. Rather than the owner paying this money back, it is simply deducted from the owner’s equity balance. Balance Sheet The balance sheet is a statement of financial position. The balance sheet contains assets , which are items of value, such as a building. Liabilities are items that a company owes, such as utility bills. Liabilities are found under the account name "Accounts payable." The word pay means that a company owes it. The Owner’s Equity section includes the ending balance from the statement of owner’s equity. The accounting equation (which is assets = liabilities + owner’s equity) must balance, or the balance sheet is not correct. Financial Statement Overview Financial statements are important to both the internal user and the external user. The internal user may want to review the financials to determine whether employee salaries might be increased. The external user may want to determine whether he or she would like to invest in the business. All of the financials must tie to each other and must be completed in the proper order. The statement of owner’s equity must include the net income from the income statement, and the balance sheet must include the ending balance from the statement of owner’s equity. Rules of Debits and Credits Debits are not bad; credits are not good, and vice versa. Debits and credits are based on the account type and not on additions or subtractions. Assets, expenses, and owner’s drawing accounts are debited. Liabilities, revenue, and owner’s equity accounts are credited to increase a current balance. It is important to learn this concept early on because it will make the transaction process easier to understand and master. Financial statements present a score on how an organization is performing over a period of time and its status at any point in time. The following are four basic financial statements for most organizations: The balance sheet: Also called the statement of financial position, the balance sheet shows, at a specific point in time, what an organization owns (assets) and what it owes (liabilities). The difference between assets and liabilities is referred to as equity .
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