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