Income statements and balance sheets are important accounting documents used by organizations, particularly in the US where they must be filed with the SEC. Income statements list income and expenses over a period, while balance sheets provide a snapshot of assets, liabilities, and equity at a specific point in time. These documents, along with retained earnings statements and statements of cash flows, make up the four basic financial statements used to analyze a company’s financial health.
Income statement and balance sheet are two types of accounting documents that can be used by any organization. These two reports are particularly prevalent in the United States because the official forms of the documents, by law, must be regularly filed with the United States Securities and Exchange Commission. Information from the income statement is used to create retained earnings statements, balance sheets, and statements of cash flows.
Income statements, sometimes known as earnings statements or operating statements, list a company’s income and expenses for a specified period of time. The record also presents the net capital gain or loss resulting from expenses and income. When revenues are higher than expenses, the company has made a net profit, or made a profit, during the time period shown on the income statement. Expenses that exceed revenue indicate that the company has suffered a net loss of funds.
Rather than covering a period of time like the income statement, balance sheets provide accounting information for a single point in time. In general, accountants keep ledgers, which are informal records of the company’s economic events. The accountant organizes these events using the fundamental accounting equation, which is assets plus liabilities equals owners’ equity. Balance sheets list the ending amounts of assets, liabilities, and equity for a particular date.
The information in the income statement is used to create the balance sheet, but that information is first filtered through a retained income statement. The process begins when the accountant transfers the balance from the income statement, or the deficit, depending on the circumstances, to the statement of retained earnings. In the statement of retained earnings, the accountant subtracts dividends from the net income or loss carried over. The result is retained earnings, which is shown in the Liabilities and Equity column of the balance sheet.
Cash assets listed on balance sheets are used to create statements of cash flows. Along with the income statement and balance sheet, the statement of retained earnings and the statement of cash flows make up the four basic financial statements. Business leaders, investors, and US government officials use the income statement and balance sheet, as well as other documents, to study a company’s business operations and determine its overall financial health. Various financial calculations and ratios can be determined using the numbers in these statements, including the company’s debt/equity ratio and operating margin.
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