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Financial statements

The term financial statements implies that statements prepared or produced at the end of accounting period (for example at the end of an year) for the purpose of communicating the financial information of a business’s activities to its stakeholders

Financial statements are produced in structured manners and in specific form to present relevant information

Different types of financial statements

Income statement or profit and loss account

A statement that shows revenues, expenses and net income or profit. In short, it reflects the operations of a business in a financial period

Balance sheet or statement of financial position

A statement which presents assets, liabilities and capital of a business. All in all, it represents the financial position of a business

Cash flow statement or statement of cash flow

A statement that presents the cash and cash equivalents receipts and cash payments during a specific accounting period by the business

Statement of changes in equity

A statement that shows the changes in the capital or equity of a business during an accounting period 

Accounting policies and explanatory notes

Accounting policies adopted while preparing financial statements


Uses or Applications of financial statements

  1. The owner (or owners) of business want to know the financial position of business either business is in profit or in loss
  2. Investors because they want to invest in business (e.g. they purchase shares, bonds etc.)
  3. Loan providers, banks and creditors want to know the profitability and financial position of a business
  4. Management of business needs financial information for the decision-making
  5. Business's employees want to know the stability, future prospects and scope of business for their own welfare in business organization
  6. Government for the income tax purpose and government agencies for various other purposes

Income statement

(Also referred to as operating statement or statement of operations, profit and loss statement (P and L or P&L), statement of financial performance, earnings statement.)

Income statement is a statement that shows revenues, expenses and the net income/loss of a business for an accounting period (for example an year). It represents the profitability of a company

Revenues

Revenues are the gross inflow of economic benefits during a period arising in the ordinary course of business and this inflow of economic benefits results in increase in the capital of the business

EXAMPLES
Sales of goods and services, interest and commission income, profit on the sale of fixed assets, discount received, dividend receipts etc...

Expenses

Expenses are the gross outflow of economic benefits during a period arising in the ordinary course of business and this outflow of economic benefits results in decrease in the capital of the business

EXAMPLES
Purchases of goods, rent expenses, salaries, wages, interest expenses, loss in the sales of fixed assets, electricity and heating expenses, carriage, freight, telephone bills, transportation costs, loss of raw material during production process, discount and allowance on sales of goods and services etc…

Net income

Net income is the excess of revenues over expenses in a specific accounting period.

Net loss

Net loss is the excess of expenses over revenues in a specific accounting period.

Net income and Net loss

Total revenues less total expenses is the figure of net profit or net loss

Net Profit or Net loss = Total Revenues – Total Expenses

EXAMPLE

For example a business earn $1000 & its expenses are $500. Therefore, Its profit will be $500 ($1000-$500).

In the above example, if its expenses were $1000 & its revenues were $500. Business net loss would be $500 ($1000-$500)

Let’s prepare a simple income statement to help clear these concepts
For example on December 31, 2011 a company’s trial balance shows that total revenues balance = $1000 on the credit side and total Expenses balance = $500 on the debit site of the trial balance.

Required: From the above information, prepare an income statement for the year ended on 31 December, 201



The Simple Income statement
For the year ended on 31 Dec, 2011

Total Revenues
Less:Expenses
**Net income**
$1000
  $500   
  $500