Accounting Part 1: Financial Statements

Accounting in the business world is one of those things that requires much study for the light-bulb to go off in your head. Accounting for business transactions requires mastery of the dreaded debits and credits also known as double-sided entry. It seems that most people only follow one side or the other to any entry that defines a transaction. I hope to shed some light on this and other accounting basics. My hubs will be short and to the point so that concepts can be easily reviewed and absorbed without me droning on for hours. And the good news is there won't be any tests!

In support of my comments I would like to say that I am a CPA having passed all four parts of the CPA exam at the same time back in 1994 in my first attempt and I've been in the business world for quite a long time having worked as a Controller, a Budget Manager and as a Financial Planning Manager for several public companies.

To begin with I believe an overview of the financial statements is in order. Please note I won't be discussing notes to the financial statements, statement of cash flows or changes in retained earnings until a later date. The following are the two main sets of financial statements that should be utilized and understood by anyone in the business world regardless of their job title:

Balance Sheet

The balance sheet is a statement of your financial position at any given point in time. In other words, it states your assets (cash, receivables, inventory), your liabilities (amounts you owe to your creditors) and your net worth (assets minus liabilities).

Also please note the following:

Assets = Liabilities plus Owner's Equity

This will be discussed later.

The balance sheet is stated as of the last day of any given month. The heading typically reads as follows:

My Company
Balance Sheet
As of December 31, 2010

The balance sheet format lists assets first, then liabilities and then your net worth (owner's equity section). In the asset section your assets are stated in order of liquidity (how quickly it can be converted to cash) with cash being the most liquid.

Liabilities are typically stated in order of due date (those owed in less than a year then those owed in a period longer than one year from the balance sheet date).

Both sections are further sub-divided between current and long-term assets and liabilities. The term current typically is defined as any asset that can be converted to cash within a year or is to be used to pay a liability in a year or less and a current liability being any liability that is due to be paid in one year or less.

The owner's equity (net worth section) should be the difference between your assets and your liabilities. And if you owe more than you have then you will have what is called negative net worth.

Income Statement

The income statement measures your revenues (sales) and your expenses (payroll, office supplies, postage etc.) for a given period of time. This could be for one month, a quarter (in the business world it is typically Jan - Mar, Apr - June, July - Sept, Oct - Dec) or for an entire year. The typical heading for an income statement is as follows:

My Company
Income Statement
For The Year Ending December 31, 2010

As you can see from the heading the user of the financial statement is being told that the revenues and expenses stated in the income statement are for the entire year of 2010. If you wanted it to be for shorter time frame then the heading would read: For The Month Ending Dec 31, 2010 or For The Quarter Ending Dec 31, 2010 (measures Oct - Dec).

The income statement typically is stated in the following order:

Revenues
Less expenses
Net Income

Whether you are starting your own business or are a non-financial employee (marketing, engineer, HR etc) it is important to understand the terms of the business world. You should be able to explain to anyone the basic definitions and common usage for the financial statements that I offered above without difficulty. This may seem elementary but it is a way to build towards more complicated topics in accounting. And it will help make you a well-rounded employee who will project a versatile and sophisticated image in the work place.

And now on to part 2 - Cash Basis versus Accrual Basis accounting...



 

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Comments 14 comments

WillStarr profile image

WillStarr 5 years ago from Phoenix, Arizona

Excellent TSP!

I look forward to the rest of your very understandable expertise on this topic.

Voted up and very useful.


The Suburban Poet profile image

The Suburban Poet 5 years ago from Austin, Texas Author

Thanks Will... I went back and caught a few minor errors... I hope this helps folks out. I am optimistic there's a teacher inside od me somewhere. I hope this stuff is truly useful....


telltale profile image

telltale 5 years ago

I have to admit that this is the first time that I have seen Financial Statements written in descriptive text. :) Most (if not, all) of the Financial Statements I have seen are in formatted statements, leaving the descriptive text in the Notes to the Accounts. Good Deal!


The Suburban Poet profile image

The Suburban Poet 5 years ago from Austin, Texas Author

@telltale - it's my first attempt at trying to teach what I know about accounting. It is a challenbe in that there are so many nuances but I'm going to try to make it simple and basic so anyone can understand. As I work my way through this will be for beginners. I'll leave the complex issues to others. I hope my style is easy to follow... thanks for commenting...


RUBHA822 5 years ago

good job...! but it required more ellaboration


The Suburban Poet profile image

The Suburban Poet 5 years ago from Austin, Texas Author

@RUBHA822 - thank you... I'm trying to keep it short so as not to lose anyone... it's my first crack at this stuff so I'm still feeling my way around in terms of what is important and what is not given my target audience. I'm open to suggestions...


Uriel profile image

Uriel 5 years ago from Lebanon

The Suburban Poet, thank you very much for posting this! it was really helpful especially with my accounting 210 course. I hope you continue to post such lessons, because i think i might become your loyal student. The hub was really easy to read and follow, and was a great resource to refer to:)

best regards

Uriel


The Suburban Poet profile image

The Suburban Poet 5 years ago from Austin, Texas Author

@Uriel - thank you for commenting. Your comments are exactly what I hoped to hear....


dusy7969 profile image

dusy7969 5 years ago from San Diego, California

So now you know a little bit about Accounting Part 1: Financial Statements. Even if you don't know everything, you've done something worthwhile: you've expanded your knowledge.


The Suburban Poet profile image

The Suburban Poet 5 years ago from Austin, Texas Author

@dusy - thank you for commenting... one learns when trying to explain... it's an interesting concept.


Dee aka Nonna profile image

Dee aka Nonna 5 years ago

I spent over 35 years working in non-profit organization--most of those years in senior management with the last 16 as an executive director/ceo. I've had to write grants, present financial data and all the "stuff" that goes with both the positon and responsiblity, but all the while hateing every minute of it. I was fortunate that I had people around me that I trusted who could talk me through areas where I was weak. After reading this, I wish I'd known you I might not have felt so much pain....LOL This was great


The Suburban Poet profile image

The Suburban Poet 5 years ago from Austin, Texas Author

Hey Dee - thanks for reading this stuff... it's pretty dry. As I wrote it I realized how challenging it was to make it simple but clear. I'm not totally sure that I left out important information but for those who aren't bookkeepers it's really a matter of being aware of the basics...


aloop 4 years ago

pls sent accountant value in uk.


The Suburban Poet profile image

The Suburban Poet 4 years ago from Austin, Texas Author

@aloop - I'm not sure what you mean by your comment.

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