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Publicly tradedcompanies are requiredto publish quarterly financialstatements in the US.Most other countriesrequire semi-annual reports.Virtually allcompanies will prepareannual financial statements.Using trial balances fromany two points in time,a business can createan income statementthat tell the financial story ofthe activities for that period.But remember, thechanges in owner's equityas a result of operations arerecorded in revenue and expenseaccounts rather thandirectly to owner's equity.At the end of each year,balances in the revenueand expense accounts,which are normal accountsand make up theincome statement,are transferred tothe owner's equityaccount which is a real accountand part of the balance sheet.
For Green MountainCoffee, the fiscal yearends on September 28, 2013.This is what thebalance sheet wouldlook like at the endof the fiscal yearafter the adjustment toowner's equity has been made.Thus, the income statement isconnected to the balance sheetthrough the retainedearnings account.Changes in revenueand expense accounts,which impact retained earningsduring the accounting period,are stored and shown in detailon the income statement.The difference betweenthe revenues and expensesrepresents the profitor loss for the periodand is an increase ordecrease to retained earnings.In a sense, normal accountsgive a more detailed lookat the owner's equityaccount as a whole.When we prepare thefinancial statementsat the end of a fiscalyear, the net effectof the normal accountis transferred
to retained earnings in whatis called the closing process.This process updates theretained earnings balanceto the current pointin time and resetsthe balances in thenormal accounts back to 0.Financial Position vs. Financial PerformanceWe say that the balance sheet shows the company’s financial position, because it showsthe balance of all real accounts at a single point in time, as of a specific date, such as December 31, 2014. This is a snapshot of a point in time, similar to a photograph. The balance sheet is sometimes referred to as the statement of financial position. Conversely, we say that the income statement shows the company’s financial performance, because it shows the accumulation of all nominal accounts over a period of time, such as for the year ended December 31, 2014. This is a view into a period of time—think of a video, as opposed to a photograph. The income statement is sometimesreferred to as the statement of profit or loss, or P&L. This is Green Mountain Coffee Roaster’s trial balance at the end of the period, after all the transactions for the year have been posted.The trial balance contains all the information we need to create an income statement. While formatting details can vary slightly from business to business, inthis course we’ll focus on one of the most common formats.
Before we move on, let's recapthe very important conceptsof real and nominal accountsas well as accounting periodsand the closing process.