| The Equity Accounting System: User's Guide Rev 2.0 for Equity V3.305 | ||
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Financial statements summarise account balances in reports that we can use to give us important business information. We will examine the most commonly used financial statements.
The purpose of the balance sheet is to show what a business owns, and what it owes. These two totals must be equal, because everything the business owns it must have borrowed money to acquire. And all the money a business has borrowed must be represented by something it owns. If these two groups are listed, the two totals must balance. This is why the report is called a balance sheet.
Assets = Liabilities + Capital Owns = owes others + owes owner
An example of a balance sheet is shown below.
| Assets | ||
| Cash in Bank | 1050 | |
| Debtor Control | 375 | |
| Stock on Hand | 200 | |
| Total Assets | 1625 | |
| Liabilities | ||
| Creditor Control | 350 | |
| Capital | ||
| Owner's Equity | 1000 | |
| Profit/Loss | 275 | |
| Total Capital plus Liabilities | 1625 |
Note : In this report the liabilities and Capital accounts have been added together under Total Liabilities to shown how the Balance Sheet should balance. Your accountant may want these two account types listed separately.
To reach its financial goals a business uses all its resources to generate revenue (income). Every business hopes that the revenue will be greater than the expenses to obtain that revenue. If this happens the business makes a profit. If not, it makes a loss.
Profit = More revenue than expenses. Loss = More expenses than revenue.
The Profit & Loss Statement tracks revenue and expenses, and the difference between them.
This profit or loss has to be shown in our accounts. As the owners run a greater risk in the business, a profit or loss should be recorded in the Capital (equity) accounts.
An example of a Profit & Loss Statement is shown below. Note that the profit or loss shown in the balance sheet (shown on previous page) under the heading Profit/Loss matches the total profit shown here.
| Revenue | |
| Sales | 625 |
| Total Revenue | 625 |
| Expenses | |
| Cost of Goods Sold | 250 |
| Advertising | 100 |
| Total Expenses | 350 |
| Profit/Loss | 275 |
To do all this classifying, recording and summarising manually is a headache. There is always a delay, or the chance of a mistake. With Equity Accounting, all you need do is enter the basic transactions and Equity will post to the Ledger, calculate balances, present the financial statements and determine the profits or the losses.