Building Financial Statements for Your Business 

In this article we are going to focus on the income statement balance sheet as well as the chart of accounts. 

Income Statement 

Every business should use an income statement or profit and loss statement to keep track of their revenue and expenses. Within an income statement you can identify the amount of money a company made (revenue). You also can obtain how much a company spent in order to produce or sell goods (expenses). When you subtract your revenue from your expenses you are given net income or net loss. Your net income/loss tells you if your company made a profit or had a loss for whichever period is in question. An income statement keeps track of revenue and expenses for a period of time. For example, I may want to know how my company did for the 2nd quarter in 2010. Your accounting software will be able to gather information for whatever dates you enter into your system. Common expenses include; cost of goods sold or COGS (this is what it cost a company to produce or purchase products), utilities, insurance, wages, supplies, etc. In essence an income statement paints a picture of a company's financial position over a span of time. 

Balance Sheet 

While an income statement describes a company's financial position over a period of time, a balance sheet is more like a snapshot at a specific point in time. Within a balance sheet you are able to decipher what a company owns or its assets. Examples of a company's assets may be the building or equipment it owns, how much cash they have or their accounts receivable. A balance sheet also describes what liabilities the company may have. For instance, a company may have a bank note, accounts payable, salaries payable, etc. Also on a balance sheet you have an equity account. This account will show how much an investor contributed to the company or how much retained earnings were added. Retained earnings are the net profits a company made that are not reinvested or paid out to shareholders in a dividend. A simple formula to know regarding a balance sheet is: Assets = Liabilities + Stockholders equity. If your balance sheet does not match this, you know a mistake has been made somewhere along the way. 

Chart of Accounts 

The Chart of Accounts is your assets, liabilities, and expenses that you must keep track of. This chart contains the list of all your accounts and what you call these accounts. When keeping track of your finances you must use a double entry system in order to stay balanced. Within that double entry system you have debits and credits. Examples of normal debits are assets, expenses, and dividends. Examples of normal credits are liabilities, revenue, and common stock. When you debit something you must also credit something in order to balance. For example when a customer buys an item on account, the journal entry would be a debit to accounts receivable and a credit to sales revenue. Both these entries increase this chart of account items. Let's say someone was to pay for the last example I gave. You would debit cash and credit accounts receivable. This journal entry would increase cash but decrease your accounts receivable. 

The process I have laid out here are the basic processes that a company uses in order to keep track of their finances and to help ensure they stay in business for as long as possible. That being said, the use of these financial statements do not guarantee a company will be profitable, but not following this process will greatly increase the likelihood of failure. If a company does not have a good grasp on their finances they will have no way of knowing if frauds are being committed, if they will have enough money to pay it's employees, or if they have the ability to purchase needed supplies.