The two major components of financial statements are the balance sheet and the income statement.
The balance sheet shows a company’s financial position at a set point in time, usually at a year end or month end. It lists the company’s assets, or what it owns, and its liabilities, or what it owes. Next it shows the difference between assets and liabilities, which represents the company’s net worth, or equity.
The Balance Sheet is always in balance, thus its name. Assets equals Liabilities plus Equity. The assets are shown on the left side of the balance sheet, or at the top. The liabilities and equity will be shown on the bottom, or on the right.
The income statement reflects how a company has performed over a period of time, such as a month or year. It usually shows a company’s sales and expenses over that period of time, and the resulting profit or loss.
It is important to understand the balance sheet shows a company’s financial position at a set point in time, while the income statement shows a company’s performance over a set period of time. The income statement usually shows performance over a period such as a year, or month. The balance sheet shows a “snap shot” of it’s financial position exactly at the year-end or month-end.
Accounting is a “double-entry” system, which means that every accounting entry has two sides to it, a debit and a credit. For example, when a company makes a sale, it not only has the sale (or credit), but it also will have an increase in an asset such as cash or accounts receivable (the debit). Conversely, when a company records an expense (the debit), it will also have a decrease in cash or an increase in accounts payable, which is the credit side of the entry.