During today’s class, I was impressed by the question that could you ever really understand the income statement without understanding comparative? I never thought about this question before.
In financial accounting, the balance sheet and income statement are the two most import types of financial statements. A balance sheet lists assets and liabilities of the organization as of a specific moment in time, i.e. as of a certain date. An income statement is a report for income and expenses over a specific time period, usually a quarter or year. It shows how a company has performed by listing sales and expenses, and the resulting profit or loss. It also shows earnings per share, which shows how much money shareholders would receive if the company distributed all the net earnings for the period. A company with strong income statements year over year will generally build a healthy balance sheet but it is possible that it may have a strong balance sheet but weak income.
Accounting is a “double-entry” system. Every accounting entry has two sides to it, a debit and a credit. For example, a sale recorded on an income statement will increase an asset, such as cash or accounts receivables, on the balance sheet, and an expense decreases an asset or increases a liability. Sales revenue on an income statement will affect cash and accounts receivable, while cost of goods sold will affect inventory and accounts payable. An income statement for a specific time period can