Thursday, December 3, 2009

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Income Statements, Balance Sheets, and Accounting Systems

Income Statements, Balance Sheets, and Accounting Systems   by Anthony Rainey


in Accounting   (submitted 2009-12-02)



0
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Income statements, balance sheets, and accounting systems all go hand in hand when handling finances. Many times, these items are handled by accounting software packages, tax software, and ever CRM or ERP systems.
There are quite a few differences between income statements and balance sheets. An income statement outlines a current year's performance. It shows revenue and Net profit, as well as the company's income and expenses for a set period. The Income statement is also sometimes called a profit and loss statement.
A balance sheet is more like a snapshot of a company's current financial situation. It describes the overall position of a company from year to year. It provides information about the company's assets and liabilities. The assets section of a balance sheet typically contains information regarding cash, investments, property, and accounts receivable. The liability section shows the company's debts and liabilities: accounts payable, taxes, mortgages, etc. The equity section illustrates the company's book value, which is always assets minus liabilities (assets - liabilities = equity).
To tie these into temporary and permanent accounts, it is important to understand that temporary accounts include everything involving revenue, expenses, and income. Typically, the balances of these accounts increase throughout the year, but then drop to zero towards the end of the fiscal year. These accounts effect the income statement. Permanent accounts are what hold the company's assets, liability, and stockholder equity. These tie in more with the balance sheet, as their balances are carried forward from year to year.
To keep track of these assets and balances, we use accounting systems. An accounting system, by definition, is the means by which a company and its staff produce accounting information. They are a formal mechanism to gather, organize, and communicate information. This can include the use of employees, equipment, software and other resources. Some types of accounting systems include accounting software, small business suites, CRM applications, and SaaS software platforms. For this articles purpose, the accounting systems that we'll discuss are: Financial Statements (aka the Financial Accounting System), Trial Balance System, and Fixed Assets.
The Financial Accounting System deals with financial statements. It is seen as the heart of accounting, as it keeps track of everything. It is used to produce income statements, balance sheets, cash flow information, and more. It also has the charter of accounts, and the general ledger with all accounts summarized. The Trial Balance System allows us to see all accounts lined up separately with their balances. This also shows all debits and credits, and allows for adjustments. Here, you review the data, make the proper adjustments, and place all of the accounts on a balance sheet and/or income statement. The Fixed Assets System keeps track of all hard assets. This system is widely used for depreciation and expenses. For each asset in the system, we have an asset tag, an asset description, location, acquisition date, cost, accumulated depreciation, and net book value. This system keeps track of all fixed assets and depreciation.

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