In this article, we will be taking a look at the financial statements. This looks at the historical cost incurred by the business and consists of assets, liabilities, capital, income and expenses.
The main three are, Balance sheet, Income statement (profit/loss) and Cash flow statement. The Balance sheet provides a snapshot of what the business owns and owes at a particular date and conforms to the accounting equation in which Capital = assets – liabilities.
The Income statement provides an accurate view of how the profit or loss is arrived at. This consists of the gross profit on sales (trading account), the income from other sources (e.g. interest) and administrative and financial expenses. This statement only contains resources consumed or disposed to generate income in the financial period and as such, all unsold stock and inventory must be deducted.
The cash flow budget shows cash dispersed and received to suppliers, customers, employees and others in detail for the period. Remember that the purchases and sales made on credit may remain uncollected and all goods purchased may not have been sold.
Profits are a matter of opinion and cash is a matter of fact!
Next time: Measuring performance
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