Contractor Accounting: Financial Statements
Friday, October 05, 2007
This is an ongoing series called Contractor Accounting 101.
Financial Statements:
After organizing all your company transactions into accounts, it is important to use this information to describe your business. Financial statements pull numbers together at the end of a month, quarter, or yearly cycle. The most important statements you’ll use are the Balance Sheet and Profit and Loss. They must be viewed together and they must be viewed often. The Balance Sheet is the same as the Accounting Equation:
Assets = Liabilities and Owner Equity
(For a review of the Accounting Equation, go here)
The Balance Sheet is a snapshot of your company at that time. It lists the Assets (Cash, Vehicles, Accounts Payable), Liabilities (Accounts Receivable) and Owner Equity (Your investment in the business, Earnings, etc.)
A Profit and Loss statement looks at the money generated (Revenue), minus the cost of products and labor (Gross Profit), minus the cost of operating expenses (Net Income or Loss). This statement is for a period of time – unlike the Balance Sheet, which is a moment in time.
Here is a sample Profit and Loss Statement (also called an Income Statement):
After you record your Net Income in the Profit and Loss statement, place this amount in your Balance Sheet. It is part of the Owner Equity, called Current Year Earnings. Year after year, the Current Year Earnings account is closed and put into a permanent account called Retained Earnings.
RELATED POSTS:
Contractor Accounting 101
Cash vs. Accrual Accounting
The Accounting Equation
Types of Accounts
Financial Statements:
After organizing all your company transactions into accounts, it is important to use this information to describe your business. Financial statements pull numbers together at the end of a month, quarter, or yearly cycle. The most important statements you’ll use are the Balance Sheet and Profit and Loss. They must be viewed together and they must be viewed often. The Balance Sheet is the same as the Accounting Equation:
Assets = Liabilities and Owner Equity
(For a review of the Accounting Equation, go here)
The Balance Sheet is a snapshot of your company at that time. It lists the Assets (Cash, Vehicles, Accounts Payable), Liabilities (Accounts Receivable) and Owner Equity (Your investment in the business, Earnings, etc.)
A Profit and Loss statement looks at the money generated (Revenue), minus the cost of products and labor (Gross Profit), minus the cost of operating expenses (Net Income or Loss). This statement is for a period of time – unlike the Balance Sheet, which is a moment in time.
Here is a sample Profit and Loss Statement (also called an Income Statement):
After you record your Net Income in the Profit and Loss statement, place this amount in your Balance Sheet. It is part of the Owner Equity, called Current Year Earnings. Year after year, the Current Year Earnings account is closed and put into a permanent account called Retained Earnings.
RELATED POSTS:
Contractor Accounting 101
Cash vs. Accrual Accounting
The Accounting Equation
Types of Accounts
Labels: Accounting
Contractor Accounting: Types of Accounts
Monday, October 01, 2007
This is an ongoing series called Contractor Accounting 101:When you're organizing all your company transactions (deposits, payments, accounts receivables), you want to create accounts which go beyond just recording debits and credits. There are 5 types of accounts (and these can be expanded into sub-accounts to provide you with more information.) There are Asset accounts, Liability, Equity, Revenue, and Expenses.
- Asset Accounts are what you own.
- Liability accounts are amounts you owe.
- Equity accounts are what you own after liabilities are removed.
- Revenue accounts include money brought into your business.
- And Expenses accounts are what you spent to generate revenue.
For example, entries in an Asset might include:
1000 Petty Cash
1100 Checking Account
1200 Vehicles
1300 Tools & Equipment
And entries in a Liability account would look like this:
2000 Accounts Payable
2100 Payroll Tax Payable
2200 Health Insurance Payable
2300 Other Current Liabilities
Many accounting software programs will handle updating all your purchases, payments, and revenue. But, if you were to do it all by hand, you would use what's called the Double Entry Method. It allows you to use your Accounts to keep track of money coming in and going out. Even though it's called "double entry", more than one account may be affected.
Here is an example of how each of your accounts is affected. Say you make a purchase of a new drill press. It would add $250 to your Tools & Equipment account as a Debit. And there would be a Credit to your Checking Account of $250. A Debit is listed in the left hand column of any account when it comes in to the account.
A Credit is listed in the right hand column whenever it leaves an account. $250 came in to Tools account. $250 went out of the Checking Account.
RELATED POSTS:
Contractor Accounting 101 - an Introduction
Cash Accounting vs. Accrual
The Accounting Equation
Labels: Accounting
