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General accounting

V. 26. Income Statement and Balance Sheet: beginning of a higher view

 

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Text

 

 

We reached our first Income Statement and Balance Sheet. Now we shall begin to study them from a higher view-point.

is and bs

Comment on the IS:

 

Comments on the BS:

 

With these newly learned IS and BS, we are like a child who holds for the first time a violin in his hands. In the next lectures we shall begin to learn how to play the violin. In truth it will take years.

 

 

The above IS and BS come from the following journal:

journal

and following TB

trial balance

We included adjustments for stocks, for amortization and for provision for bad clients.

But we left aside other adjustments (for prepayments and for accruals) because they are less important concepts (although you must understand them, and if necessary go back to the lesson on this topic).

It is important that you be able to prepare the Trial balance from the above journal, and, after the adjustments (shown in blue), that you know how to prepare the Income Statement and the Balance Sheet.

The mini_accouting.xls is here to help you if necessary.

 

 

The Income Statement is comparatively the simpler of the two year-end documents.

An Income Statement concerns a whole accounting period, most usually a year, frequently the calendar year.

It measures sales minus all the costs to produce the sales.

And it yields the Profit or Loss (P&L).

 

 

Notice that some transactions do not impact immediately the IS.

For instance, suppose that we have a lot of cash, and we decide to invest some of it into "Short Term Financial Securities", which are sold on money markets. (The safest ST financial securities are government bonds of rich and powerful countries.)

This transaction, called "to park some money to make it work", will have no immediate impact of the IS.

There will simply be a change in the asset side of the BS:

assets
assets

Here we see that 1500€ out of 2200€ of cash (left figure) was transformed into 1500€ worth of ST financial securites (right figure).

 

 

Another example: we buy more machinery financed with a new loan (of 1000€)

Here is the BS before

balance sheet

and the BS after the transaction

balance sheet

 

 

Some vocabulary on the asset side:

assets names

The machinery and van are called the "fixed assets" (sometimes "gross fixed assets"). Their sum is 9100€.

And the balance of the three accounts "machinery" + "van" + "cumulated amortization" (to be subtracted from the other two) is called the "net fixed assets": 7980€.

 

The accounts in orange are called the "current assets". Their sum (after having properly subtracted the provision) is 10 300€.

So the total (net) assets is 19 650 - 1370 = 18 280€.

 

 

Some vocabulary on the liability side:

liabilities names

The top two accounts (capital and cumulated profit or loss) form the "net worth". Here it is 9130€.

The cumulated profit or loss is also called the "cumulated retained earnings".

 

The other accounts (in purple and light blue) are the external liabilities. They are of two types:

 

The sum of the net worth plus the costly debt is called the "capital employed". It is the money "employed" to finance parts of the assets and which does not come for free. It comes from shareholders who will receive dividends and from other lenders who will receive interest payments. It cannot be employed elsewhere, since it is employed here. The amount of capital employed in the above example is 12 130€.

This was a first light survey of the new ways we shall look at the Income Statement and Balance Sheet. The higher view will be continued in the next lessons.

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