The purpose of accounting is to be able to communicate a company’s financial information to the business world. To accomplish this, the accounting world uses financial statements. There are four different financial statements, although they are interrelated. Internal users and external users take information from these statements to make various business decisions.
Income statement is the first financial statement to be completed in the reporting process. An income statement shows how profitable a business is during a specified period by comparing revenues and expenses. If revenue is greater than expenses then a business has a net income. If the business expenses are greater than revenue then it has a net loss. Income statements only show the amount of money gained or lost from revenue and expenses. Therefore, the money a business gets from investments from the owner, or the money lost from drawings from an owner, are not on the income statement. This is so these transactions do not confuse the user on how well the business is doing.
Owner’s equity statement is the second financial statement to be completed. The reason being is you need the net income, or net loss from the income statement to complete this statement. This statement reports the change in owner’s equity over the same period of time as the income statement. Owner’s equity is the portion of the company’s assets not claimed by creditors. You begin this statement with the amount of owner’s equity from the start of the period. Then you add the amount of investments, and the net income from the income statement. If the business had a net loss on the income statement you would subtract it from the beginning owner’s equity. After you make your additions, you make your subtractions from owner’s equity, for transactions such as drawings. Once all of your additions and subtractions are made,