Introduction to Financial Statements

This brings us to a very important thing that General Ledger can provide for you: Financial Statements. Financial statements vary depending on how you want your accounting information presented, and what types of analyses you intend to do. In general, however, two financial statements are common. These are the "Balance Sheet", which presents a summary of your permanent accounts; and the "Income Statement", which summarizes your temporary accounts and indicates your current profitability. The Income Statement often includes a comparison to budgeted amounts, and is sometimes referred to as the "P & L" ("Profit and Loss") or the "Income and Expense" statement.

The Income Statement is an analysis of your temporary accounts. These are "Income", or "Revenues", which are credit accounts; and "Expenses", which are debit accounts. On a typical Income Statement the Revenues will be listed first. These itemize the current activity for the goods or services that your business sells. Offset against these are the current Expenses, which include such things as office supplies, monthly insurance premiums, rent, and employees' wages. The difference between revenues and expenses is called "Current Earnings". This is a temporary equity account which reflects the current profitability of your company. Everyone hopes that Current Earnings maintains a credit balance, because that means that Revenues are larger than Expenses!

The Balance Sheet summarizes your permanent asset accounts ("Assets") and your permanent capital accounts ("Liabilities" and "Owner's Equity"). Asset accounts include long-term assets such as equipment and buildings, and shorter-term or more liquid assets such as cash and accounts receivable (which is the sum of the amounts you have billed your customers but they have not yet paid). Liability accounts include mortgages, taxes owed, and accounts payable (which is the amount you have been billed for goods or services and have not yet paid); and equity accounts include the amounts invested by stockholders and/or the company's owners.

Another, special type of equity account is called "Retained Earnings'. This account reflects the company's ongoing profit or loss, summed over all the years that the company has been in business. On your Balance Sheet, the total of all your assets should exactly equal the total of all your liabilities plus your Owners' Equity (which includes year-to-date Current Earnings).

At the end of each fiscal year, year-to-date Current Earnings (total profit or loss for the year) is added to the Retained Earnings equity account; and then all revenue and expense accounts are zeroed to begin accumulating for the next fiscal year.