Updated: Jun 16
To understand how well your company runs, you must know two records: income statement and balance sheet.
The income statement shows you how profitable your business is over a given period (through revenues and expenses), while the balance sheet gives you a snapshot of your assets and liabilities. Together, they’re a financial force to be reckoned with.
In the following guide, we’ll explore the role of these financial statements to show just how useful they can be to your business.
Income statements - show you what you’re working with
To find out how revenues and expenses contribute to profitability across a period of time, an income statement is prepared. It can theoretically be calculated over any time period.
The income statement is a primary indicator of a company’s performance. It focus on four primary items: revenue, expenses, gains, and losses. The statement breaks down how net revenue realized by the organization is transformed into net profit or loss by computing net income and then detailing earnings per share (EPS) if stock is offered.
Balance sheets - show you the big picture
By knowing what a company owns (assets), what it owes (liabilities) and what is leftover for the company owners after paying off any financial obligations (owner’s equity), it is possible to understand what the company is worth at a particular moment in time.
The basic calculation used by a balance sheet is:
Assets = Liabilities + Shareholder/Owner Equity.
The balance sheet is precisely the financial statement that helps to communicate all information about a business to those who might be interested in knowing, such as creditors, investors, and owners.
As a team, income statements and balance sheets work together to show just how well the company is performing, how much it is worth, and where opportunities exist to improve the business. And, that is what a successful company builder should know.
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