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what is sometimes called a statement of financial position?
Basic Financial Statements
Let us review the two most fundamental statements of all:
• The Income Statement
• The Balance Sheet
The Income Statement is important because it will tell you if your business was profitable or not for any given period of time.
The Balance Sheet will show you the financial condition of your business, what you own, what you owe, and the owners’ financial interest.
You will sometimes hear the Income Statement referred to as the Profit and Loss Statement and the Balance Sheet called the Statement of Financial Condition.
Here’s a simple example of an Income Statement:
Income Statement - Bill’s Bicycle Shop - Year 2009
Cost of goods sold - 8000
Gross Margin $12,000
Payroll Costs -6000
Other expenses - 1000
N et Income $3,000.00
The only items that need additional explanation are “Cost of goods sold” and “gross margin”. The cost of goods sold is the total cost the owner of a business paid for products sold. Gross margin is simply the difference between Sales and the Cost of goods sold. It is an important figure for owners to watch, and you will sometimes hear business owners talk about their margins or “managing their margins”.
Here’s a simple example of a Balance Sheet.
You can see why it is called a Balance Sheet. It is because the sum of the asset accounts must equal the sum of the liability and owner’s equity accounts. In other words, they must be in balance. You can also see why it is sometimes called a statement of financial position. It shows the condition of the business, in financial terms, as of a specific date.
Cash on hand and in bank USD 8,000
Accounts Receivable 3000
Inventory - New Bicycles 12000
Parts Inventory 4000
Office Equipment 2000
Repair Equipment 1000
Total Assets USD 30,000
Accounts Payable USD 10,000
Loan from Bank 15,000
Total Liabilities 25000
Owner's Equity 5000
Total Liabilities and Owner's Equity USD 30,000
TABLE 1: Balance Sheet -Bill's Bicycle Shop- 31 December
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