The two major components of a financial statement 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. It will then show the difference between assets and liabilities, which represents the company’s net worth, or equity.
It is called a “Balance Sheet,”as it is always in balance – Assets equals Liabilities plus Equity. The assets are shown on the left side of the balance sheet, or at the top, while 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 over a month or over a 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 concept the a balance sheet shows a company’s financial position at a set point in time, while an 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, while 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) which is shown on the income statement, but it also will have an increase in an asset such as cash or accounts receivable (the debit), which is shown on the balance sheet. 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.
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