Question

Balance Sheets and Income Statements

In two separate paragraphs, explain how a balance sheet and an income statement are constructed. (For example, what are the key components? Format and contents?) What does the balance sheet tell you about how an organization functions? For what purposes are balance sheets used?

Answer 1

Income Statement : The income statement is one of the major financial statements used in the business for calculating the profitability of the business. The income statement is important because it shows the profitability of the period of income statement is prepared. So it may be monthly, Quarterly and annually and some time it may me project specific also.

In income statement there is two Parts at one parts whatever the income or earning from the business will show it may be primary income or secondary income all the income should be shown at right side of income statement. And on the left side all the expenses done to earn the income shown at right side will be came at left side. Examples are as below

A. Revenues and Gains
1. Revenues from primary activities from business
2. Revenues or income from secondary activities from business
3. Gain from sale of investment and fixed assets etc.,

B. Expenses and Losses
1. Expenses involved in primary activities done in the business
2. Expenses from secondary activities done in the business
3. Losses from sale of fixed assets and long term assets etc.,

4. Depreciation Expenses

Balance Sheet:

Balance sheet Shows the total Assets and liabilities and shareholder’s equity in the organization. IT is shows the real value of the organization. By valuing the balance sheet we know the what is the company have the worth. Balance sheets are mainly divided in Five activities which are as below,

On Assets Site,

1. Fixed Assets: This will shoes the total fixed assets of the organization less depreciation.
2. Investment : What the company have the investment done at outside of the market
3. Current Assets: This part will shows the current assets of the organization

On Liability Side:

1. Liabilities: This will be short term liabilities and long term liabilities
2. Owner’s Equity: It will shows the total of there investment in capital and reserves and surplus balance.