Every company has to produce a set of financial statements which include a balance sheet, a profit and loss account, a cash flow statement and a statement of retained earnings. These are produced during the fiscal year of the company and the start of the fiscal year is decided at the conception of the company. Each year is split into four quarters.
Balance sheet
At the end of a company’s fiscal year a company needs to publish a balance sheet, which is a statement of the financial value of the business. Since it is produced at the end of the fiscal year it is just a snapshot of the company’s financial situation. The balance sheet is the only financial statement that relates to a moment in time. It has two parts, firstly showing the assets or debits which are the company’s money, investments and the claim for payments owed to the creditors. The assets can be a bit misleading on the balance sheets as it will not necessarily show what the assets were initially bought for, but what they are valued at now, whether it includes a write up or a write down. Secondly it shows the liabilities or credits which is everything that you owe to others. The basis of all balance sheets is double entry book keeping.
Profit and loss
The profit and loss statement shows the company’s income and expenditure over the fiscal year. It is a summary of the financial transactions for the business and is also known as the Income and Expenditure Account. For the smaller companies, sole traders and partnerships the laws are much more flexible in terms of producing a profit and loss statement. It is more regulated for limited companies and is set out in the Companies Act of 1989.
A general profit and loss account has to show the sales minus the cost of sales which will generate the gross profit. From that the operating expenses needs taking away from it, which include any depreciation, wages and NI, administration expenses and any other costs. Once the operating costs have been accounted for then it will leave the profit before tax and interest. Once these factors have been taken off, the profit for the year will be left. The shareholders have then got to be allocated their dividends, so the last thing to go on the profit and loss account is the dividends paid and proposed, which leaves the retained profit for the year.
Cash Flow Statement
A cash flow statement shows the incoming and outgoing money over a period of time and does not show any non cash depreciation. It is a short term viability statement that is used by internal accountants for pay roll and expenses. It is also a statement for potential lenders, creditors and investors. Cash flow statements are very important for start up companies to show what credit they have.