Written by Padma Ganeswaran
The basic Financial Statements of a company generally consists of the Balance Sheet, Profit & Loss Statement and the Statement of Cash Flows.
The Balance Sheet shows what a company owns and what it owes at a fixed point in time. The balance sheet provides details about company’s assets, liabilities and Shareholder’s equity. Assets are the things that a company owns that have value, which includes physical property and intellectual property such as trademarks. Liabilities are the amounts of money that a company owes to others like Banks, Taxes, Suppliers etc. Shareholders’ equity is called net worth. It is the money that would be left if the company sold all of its assets and paid of all of its liabilities. This belongs to the owners of the Company.
The Statement of Cash flows shows the report of a company’s cash inflows and outflows of cash over a period of time. It is important because a company needs to have enough cash on hand to pay its expenses and to purchase capital assets if required. The Cash flow tell whether the company generated cash over a period of time.
A Profit & Loss Statement shows how much revenue a company earned over a specific period of time and the expenses associated with earning that revenue. The bottom line of the statement shows how much the company earned or lost over a specified period. The Profit & Loss Statement is used to show the past financial performance of a company, predict future performance based on the historical figures, and assess the company’s ability to generate future cash flows. It is also known as the Income Statement, Statement of Operations or Statement of Earnings.
The Profit & Loss Statement can be prepared on cash basis or accrual basis of account. Cash basis method accounts for income only when the money is received and for expenses only when the money is paid out. On the other hand, the accrual basis method matches up of revenues to expenses when the transaction take place instead of when payment is processed or received.
The Profit & Loss Statement comprises of the following main elements:
Income: Income earned from the principal activities of the company.
Cost of Sales: Cost of Sales represents the cost of goods sold or services rendered during an accounting period. For retailers, it is the sum of inventory at the start of the period and purchases made during the period minus any closing inventory. The cost of sales is the direct cost associated with income, this may be inventory, wages in a service industry or a combination of these in manufacturing.
Other Income: Other Income refers to Income earned that is not related to the company’s main business. Interest from bank deposit etc will be shown here.
Operating Expenses: Operating expenses generally comprise of costs related to the management and support functions within an organisation that are not directly involved with the principal activities of the company, the general operating expenses
Finance Expenses: Finance charges usually comprise of interest expenses on loans.
Income Tax: Income tax expenses recognised from the current period profit.
Gross Profit: Gross Profit is the Income left after paying of Cost of Sales. Gross Profit is helpful in controlling excess costs. Gross Profit = Net Sales – Cost of Sales.
Operating Profit: Profit before Interest and Income Tax is commonly called Operating Profit . It is also known as Earnings before Interest and Tax (EBIT). Operating Profit is the Income of the Company left after paying off all operating expenses but before Interest and Taxes. Operating Profit is helpful in finding and eliminating unnecessary operating expenses. Operating Profit = Gross profit – Operating Expenses.
Net profit: Net Profit is the residual Income left with the company after all expense deductions. This is very helpful in knowing the performance of the company in a financial year.
Net Profit = Operating Profit- Interest – Taxes.
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