The health of any business is indicated by its financial statements. The Balance Sheet shows the business solvency and the worth of its assets and liabilities at a point in time. The Income statements show the income, expenses and the resultant profit over a period of time and reflect the profitability or viability of the business.
Assets are resources owned by the business, even with future monetary value and also include those costs the benefits of which are still accruing. These should be recorded on the date acquired at the cost acquired, inclusive of procurement costs till it is put to use. This article explains the treatment and recording of assets in the Balance Sheets and Income statements.
Assets in the Balance Sheet. Assets are listed as at the end of the accounting period with the claims against these including liabilities, creditors'/owners' claims and investment. They fall under the basic classifications:
- Current Assets are controlled resources, from which the organization expects to gain a future benefit. Long Term or Fixed assets are not for sale in the period succeeding the balance sheet date and will be maintain by the business for more than one year ahead.
- Cash - in the bank, on hand, in trust and includes petty cash
- Securities - like stocks, government bonds, and treasury bills usually shown at cost or their market value
- Receivables -include accounts receivable from customers
- Bad debt allowance - is the bad part of the accounts receivable and is subtracted from it to show an accurate valuation
- Notes receivable - face value of all notes given to the business including those discounted
- Discounted Notes receivable value has to be subtracted from the above or added as a footnote reflecting the contingent nature
- Receivables from employees and owners - show the advances due from persons related with the business
- Stock Inventory - will reflect value of business inventory and have different methods of valuation
- Purchased Inventory - show, at cost or replacement cost whichever is lower, inventory which are bought to be sold with little or no value addition
- Prepaid and deferred items - are payments for goods or services the benefits of which will be derived in the future or over a period
Plant, property and machinery. These include all the fixed assets used in the day-to-day operation of the business and have a long life. These assets are recorded at their original cost with the depreciation being subtracted from each asset value. There are different methods of spreading the cost of the asset over its estimated useful life and all will record the same total depreciation over the life of the asset with variations in the amount recorded in any one year.
Intangible assets. These include trademarks; patents and goodwill are shown as the purchase cost or developing cost. Goodwill is normally when it has been valued during the purchase of the business.
The Income Statement. This shows the net result of operations over a period and records:
- Revenue from business, income from rent, interest
- Cost of goods sold is the cost of goods purchased (during the accounting period&includes transportation cost) plus inventory at the beginning and minus the inventory at the end of the period.
- Gross margin is the difference between income from operations and cost of goods sold and covers operating expenses, taxes, and profit.
- Operating expenses (like expenses for utilities, wages, insurance etc or other using up of assets during the accounting period) are subtracted from the Gross margin to arrive at Net Income (before income taxes).
As a final word, the above are overall norms and it is the country organisation's standards with the international accounting standards, which serve as the ultimate guideline for all financial records.