Mastering Ledger
Mastering Ledger
Finance is the art of passing money from hand to hand until it finally disappears.
– Robert Sarnoff
In this unit, we will introduce the income statement, cash flow statement, capital statement, and budget versus actual. These terms all involve money or the use of money in some form. When we are done, you will have a better understanding of how the use of these methods will help your business run more efficiently. You’ll be swapping accounting terms with that hotshot accountant friend of yours in no time.
Income Statement
An income statement is a financial statement that summarizes the amounts of revenue earned and the expenses incurred by a business or entity over a period of time, which measures the financial performance of a business. This statement includes a summary of how a business typically incurs its revenues and expenses over a fiscal quarter or year. “Profit and Loss Statement” or “Statement of Revenue and Expense” are also terms used in reference to the income statement.
Income statements are divided into two parts, which are the operating and non-operating sections. The operating section will cover information with regard to revenues and expenses, which are directly related to or resulting from normal business operations. For instance, for a restaurant, the food the business must buy and then sell can be listed as both revenue and an expense. The non-operating section on the other hand, deals with revenues and expenses that are not directly related to the business’ normal operations. For instance, if a business were to have an all-expense paid company picnic for its employees, this could be considered an abnormal expense, unrelated to normal business operations and would therefore go under the “nonoperations” section as a non-operations expense. Additionally, if the business as a whole had shareholders equity or “stock” in another business or company’s product, any profits obtained from the stock would be non-operations revenue.
Cash Flow Statement
The Cash Flow Statement is a part of a total of four statements which also include: Balance Sheet, Income Statement, and Statement of Retained Earnings. The cash flow statement shows the flow of cash within the business, where that money came from, and how that money may have been spent during a certain time period. This statement can prove to be very important because it allows the cash flow of the company to be tracked from its origin, by indicating which types of transaction help create cash flow.
There are three forms of cash flow: operating cash flow, outbound cash flow, an inbound cash flow, each of which can be found on the statement of cash flows.
- Operating cash flow would be any cash generated from normal operations of the business, which is then calculated and adjusted to produce the net income. This is basically the money a business gets for being a business, whatever type it may be. It provides a better look at what profits the business makes rather than just its earnings. This type of cash flow would be used to pay debts and bills.
- Outbound cash flow is any money that a business must pay out when they complete a transaction with another party. This includes wages for employees, federal and state taxes, as well as the money it pays for the products it sells. Basically, whenever the business is required to pay money, this money is outbound cash flow.
- Inbound cash flow is the opposite of outbound cash flow and is quite similar in some ways to operating cash flow. It is any money a business receives via a transaction with another party. This can include cash flow generated from normal business operations sales, refunds received from suppliers, and gains from legal proceedings. It is any positive monetary addition to the bank account of a business.
Capital Statement
The Capital Statement is a statement that is concerned with, or keeps track of the items that are going to last for longer than one year, like the long term assets of a company (e.g. buildings).
The Capital Statement’s major duty includes keeping track of the owner’s account prior, current as well as the ending balance. It also serves as a connector between the income statement and the balance sheet. Capital Statements are usually checked monthly or annually.
Budget vs. Actual
The main purposes of a budget are to plan for the future and to control the long term operations and spending of a company. Just like any budget, at a certain time, it may be adjusted according to what is needed, or changes that have occurred since the budget was created. Past financial statements are often used when creating a budget. These allow one to see what has worked in the past and what has not.
Additionally, a list of all possible sources of income should be kept as reference and updated when necessary. Creating a budget mainly involves considering all possible expenses. Some expenses are fixed and others are variable. This means some do not change and others have the ability to change from month to month or year to year, for example. Though a budget is the ideal or projected amount of money a business expects to spend, things are not always so. This is where actual expenses come in. The actual on the other hand is when the revenues or expenses are recognized on an income statement when they are incurred whether or not the cash for them has been received. While expenditures can easily change from the budgeted amount due to unexpected costs, revenue or income can also turn out to be more or less than the forecasted amount. This is why it is important to create a budget that is very much within the means of a business and based on past financial experiences and statements.
