Accounting Principals

Memo

In any business no matter how big or small financial statements are crucial if achieving success is the ultimate goal. There are three main types of financial statements, they are: Income statement, balance sheet and statement of owner’s equity. All three of these financial statements can be looked upon to see where changes can be made in a company to ensure better success.

The income statement is important because it presents the revenues and expenses allowing a company to see the net income or net loss. It is prepared by simply subtracting the expenses from the revenues.

The balance sheet however is critical in reporting the assets, liabilities and owner’s equity up until a specified date. When preparing this financial statement a company simply takes all of their assets (cash, accounts payable, supplies, equipment etc.) and adds them together to get a total dollar amount for all assets. A company also takes all liabilities and owner's equity and adds them together as well. This enables the company to get a total dollar amount for all liabilities and owner’s equity just as it can with assets.

The statement of owner’s equity is a simple statement that summarizes the changes in owner’s equity for a specified period of time. It is calculated by the simple formula of:

Beginning owner’s equity + additional investments + net income - drawings = ending owner’s equity

This financial statement allows the company to see if they are increasing, maintaining, or losing owner’s equity.

All three of these financial statements have an interrelationship with one another because each statement uses the numbers from the preceding statement. For instance the statement of owner’s equity could not be determined without the having the income statement. The reason for this is because one must know the net income/net loss for determining owner’s equity. Also the balance sheet could not be formulated without having the statement of owner’s equity because it to is needed when determining total liabilities and owner’s equity within the balance sheet.