Understanding Income Statement and Balance Sheet? - Accounting Firms in UK

 The income statement illustrates to you, over a specified amount of time, how profitable your company has been. In addition, the balance sheet provides an overview of the assets and liabilities of the company. They are a formidable economic entity when considered as a group.

In the following guide, we will investigate the function of these financial statements in order to demonstrate the value that they can bring to your company. In this guide we will learn about the income statement and balance sheet.

The income statements will show you the resources you have available to you.

An income statement, which is also referred to as a profit and loss statement, is a document that details the amount of money your company made as well as the amount of money it spent during a specific time period. You can track your financial health and find ways to improve your profit margin or increase cash flow if you go back and look at trends in your income statements. This will allow you to track your progress over time.

Instructions for putting together an income statement

Monthly, quarterly, and annual income statements are all prepared by accountants. Nevertheless, you are free to construct them for any era that you choose. Creating one requires three steps, which are as follows:

  • Gather together all of the journal entries that were written during the relevant time period.
  • Compute the total amount of money spent and earned across all categories.
  • Create a list with the sums for each category, beginning with the revenue and moving on to the expenses.
  • Your net income can be calculated by deducting all of your operating expenses from your total revenue (also known as the bottom line.) This is the money that you get to keep as a profit for yourself.
  • An illustration of how to prepare an income statement
  • Let's say that Steam, a major video game publisher, is compiling its annual income statement.

First, they divide the money they make from their three different genres of video games—First-Person Shooter (FPS), Real-Time Strategy (RTS), and Role-Playing Games (RPG)—into separate accounts (RPG).

The initial portion of the statement of income would be formatted as follows:

When the accountants at Steam have finished listing all of their total revenue, the next step is to list all of their total expenses.

To accomplish this, they aggregate the amounts from all of their various expense categories, which are as follows:

The accountants keep track of all of the company's expenses, including those that aren't directly related to game development but are necessary for the company to remain operational. In this particular instance, famished game developers will be fed beef jerky.

After taking into account both revenues and expenses, the final step in determining the net profit is to deduct the amount that was spent (97 million dollars) from the amount that was earned (150 million dollars):

According to the income statement, Steam was successful in generating $53 million in revenue throughout the course of the year.

A word of caution: if the accrual method of accounting is used in your company, the income statements will report assets and expenses as they are incurred rather than when cash is actually earned or spent. This is important information to keep in mind. You will need to prepare cash flow statements in order to gain an accurate understanding of the amount of cash at your disposal.

The following financial statement is the balance sheet, which assists in tying together what the retained earnings mean to what they mean to the overall value of the company.

The balance sheets will give you an overview of the situation.

You can find out what you own, what you owe, and what's left over by looking at your balance sheet. In other words, the balance sheet for your company will show you the company's current assets, current liabilities, as well as the owner's equity (or shareholders equity, if you're a corporation). This data will give you an idea of how much money your business is currently worth at a particular point in time.

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