One of the most common responses we encounter during meetings with clients is, “Sorry! I’m not an accountant, so I don’t know a thing about my Income Statement or Balance Sheet!” Well, here is the good news, you DON’T need to be an accountant to understand them.
As you saw from our previous blog there is no mystery around accounting terms like DEBTORS, CREDITORS, CASH FLOW, AGE ANALYSIS, etc. and your INCOME STATEMENT and BALANCE SHEET are no different.
Put very simply, your Income Statement (as the name implies), tells you what your income is for a particular month or year. Essentially it is a record of all your Sales less all your Expenses for that particular month or year.
The reason this is important, is every business needs to know if it is making a Profit (good) or a Loss (bad). The knowledge of either position is incredibly valuable when planning your businesses future.
Your Balance Sheet (once again as the name implies) reflects the balances owing either by your business or to your business for a particular month or year. Essentially it is a record of your businesses wealth, your Assets (good) less your Liabilities (bad).
The reason this is important, is every business needs to know if its Assets exceed its Liabilities. Should your business assets not exceed its liabilities, it is Insolvent and you may not trade if your business is insolvent!
The reason we look at them together is that they are interrelated. Essentially all the sales (debtors) for a particular month or year are recorded on your income statement and those clients who have not yet paid are recorded on the balance sheet as assets.
The same applies to your expenses, all expenses (creditors) for a particular month or year are recorded on your income statement and those accounts that you have not yet paid are recorded on the balance sheet as a liability.
Your profit or loss is also recorded on your balance sheet thereby putting together a comprehensive picture of your businesses health.
Your Income Statement and Balance Sheet makes up your management accounts and together they are a very powerful tool in assisting you to manage your business as all the important information you will require is in one easy to find place.
Now that we have covered the framework of what makes up your books of account, next time we will look at what you can claim as income and more importantly what are expenses……
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