Financial Statements are the reports signifying the end result of the financial accounting process. The reports are as follows:
A. Income Statement
This is a report that summarizes the business activities for a given period and reports the net income or loss resulting from operations and from certain other activities.
It normally consists of the following sections or items:
- Sales - reports the total sales to customers and fees received from clients for the period. All sales transactions should be recorded and invoiced.
- Costs of Goods Sold - refers to cost of goods relating to sales when merchandise is acquired from outsiders. This is the sum of the beginning inventory, purchases and all other buying, freight and storage costs relating to the acquisition of goods and subtracting the ending inventory thereof.
- Operating Expenses - are expenses incurred or utilized in the course of business or pursuant to the practice of profession. They are generally reported in two categories:
- Selling expenses; and
- General and administrative expenses
- Other Income and Expenses - include items identified with financial management and miscellaneous recurring activities. Other income include interest and dividend income and income from rentals, royalties and service fees. Other expenses include interest expense and expenses related to the miscellaneous income items reported.
B. Balance Sheet
This is a report that shows the financial position of the business unit as of a specified moment of time.
In order to understand the information a balance sheet conveys and how economic events affect the balance sheet, it is essential that the reader be absolutely clear as to the meaning of its two sides in the equation:
ASSETS = LIABILITIES + OWNER’S EQUITY
- Assets - are economic benefits obtained or controlled by a particular entity as a result of past transactions or events. It includes both monetary assets, such as cash, marketable securities and receivables and non-monetary assets, those costs recognized as recoverable; and hence, properly assignable to revenues of future period, such as inventories, prepaid insurance, equipment and patents.
- Liabilities - measure the claims of creditors against entity resources. Liabilities may call for settlement by cash payment or settlement through goods to be delivered or services to be performed.
- Owner’s Equity - is the residual interest in the assets of an entity that remains after deducting its liabilities. It measures the interest of the ownership group in the total resources of the enterprise. Such equities originally arise as the result of contributions by the owners and the equities change with the change in net assets resulting from operations.
Reference: RAMO 1-2000