FINANCIAL STATEMENTS Flashcards
Define the term income
Income is an element that is reported in an incomes statement as an activity of the business which brings in money for the business.
What is the purpose of financial statements
The objective of financial statements is to provide information about the financial position,
performance and changes in financial position. The two main financial statements are the income statement and the balance sheet
An income statement shows how well a business is performing over a period of time. The report shows the profit or loss made by a business. The owner needs to know how the business is performing in order to make decisions about the future, such as how to allocate resources (funds) and/or where to try to reduce expenses.
The balance sheet shows the financial position of the business. It does this by individually
displaying the assets, liabilities and equity of the owner. Potential lenders or investors will always want to look at these statements in order to determine the business’s ability to meet its financial obligations.
What are expenses
An expense is a cost that businesses incur in running their operations. Expenses include wages, salaries, maintenance
What is the purpose of the income statement
The purpose of the income sheet is to inform the reader about the ability of a business to generate a profit. In addition, it reveals the volume of sales, and the nature of the various types of expenses, depending upon how expense information is aggregated. When reviewed over multiple time periods, the income statement can also be used to analyse trends in the results of the entity’s operations
Two functions of closing entries
They close off the individual income and expense accounts ready for the next accounting period
It allows the profit or loss for the period to be calculate
