| There are three vital statements for | | | | same frequency as the Profit and Loss and |
| understanding the condition of a business or | | | | usually reflect the business on the last day |
| entity: (1) the Profit and Loss Statement, | | | | of the Profit and Loss period. |
| (2) the Balance Sheet and (3) the Sources and | | | | |
| Uses Statement. Each of them provides a | | | | Finally, the Sources and Uses Statement |
| different perspective of how an entity is | | | | reveals how the business received and used |
| operating. Combined, they show examiners the | | | | funds during the statement period. It shows |
| health of the business. Each statement | | | | how much money was provided by business |
| reflects a different perspective on the | | | | operations and how much was provided by loans |
| business' financial operations. | | | | or capital received by the entity. The |
| | | | statement also summarizes how the funds were |
| The first statement, the Profit and Loss, can | | | | used by the entity. It demonstrates if the |
| also be called the Income Statement. It | | | | company is healthy, headed for trouble, or |
| documents the amount of money coming into the | | | | just bouncing along. Like the Profit and |
| entity (the income) and the money going out | | | | Loss, this statement covers only the period |
| of the entity (the expenses). The difference | | | | shown in the statement heading. It says |
| between what comes in and what goes out is | | | | nothing about any period not included in the |
| the Net Income, if there is more money coming | | | | statement. Again, the statement usually |
| in than going out. If not, there is a Net | | | | covers the same period as the Profit and |
| Loss. The statement covers a specific | | | | Loss. |
| period, which is shown in the heading of the | | | | |
| statement. Note that it tells us nothing | | | | Taking these three statements together, there |
| about what has happened for any date that is | | | | is a present picture of the business. From |
| not included by the statement dates. Think | | | | the Profit and Loss, comes how well it did |
| of it as a snapshot for the specific time | | | | during the period, a short-term perspective. |
| period. Some common snapshot periods are | | | | From the Balance Sheet it is seen how the |
| monthly, quarterly and yearly ones. | | | | entity is accumulating assets or liabilities, |
| | | | from a long-term perspective. Finally, the |
| The second statement, the Balance Sheet, | | | | Sources and Uses statement demonstrates where |
| covers the condition of the business from the | | | | and how efficiently the entity resources were |
| time it began until the ending date on the | | | | used during the period. All three |
| statement. The Balance Sheet reveals three | | | | perspectives are important to the entity |
| important business characteristics: (1) it | | | | overview. |
| summarizes the assets owned by the entity | | | | |
| (e.g., buildings, bank accounts, inventory, | | | | To an investor or owner the statements answer |
| etc.); (2) the entity liabilities (e.g., | | | | three questions about the entity. Did the |
| loans, outstanding bills, etc.); and (3) the | | | | entity make a profit? Did the entity |
| business owners' equity. The statement is | | | | increase the owners' equity? And finally, |
| arranged in what is called the 'accounting | | | | were entity assets used efficiently? From |
| equation', which indicates total Assets will | | | | the overviews in these three statements, |
| equal the sum of Liabilities and Equity. | | | | further questions might be formulated in |
| Balance Sheets are commonly issued at the | | | | specific areas. |