Financial reports can be broken into two basic parts

July 06, 2011|By BOB POOR |

Q: I am reviewing my first business financial report from my accountant and I am a bit confused. Could you "simply" explain the difference between the balance sheet and the income statement?

A: I share your concern for trying to understand the financial reports for your business. It is not a fun exercise for many small-business folks.

• Your balance sheet shows what your business owns and what it owes at a fixed point in time, and provides details about your assets, liabilities and owner's equity. It does not show money that flows in and out of the accounts during that period of time.

Assets are things your business owns that have value and could be sold, including tangible assets such as vehicles, equipment, inventory and cash, plus intellectual assets such as trademarks and patents.

Liabilities are amounts your business owes to others, including loans, rent, vendor accounts, payroll and taxes, as well as obligations to provide goods and services to customers in the future.

Owners (or shareholders) equity is your capital or net worth. It is the amount that would be left if the business sold all assets and paid off all liabilities. The leftover money belongs to the owners.

• An income statement shows revenues over a specific time period — such as a month, quarter or year — and shows what you spent to generate that income. The literal bottom line of an income statement shows what the business earned or lost over that period.

Think of an income statement as a stairway. You start at the top with total sales and then go down one step at a time. At each step, you make a deduction for costs or other operating expenses that were necessary to earn the revenue. At the bottom of the stairs, after deducting all the expenses, you learn how much the business earned or lost.

If you are a small-business owner and are wrestling with your financial reports, call SCORE at 301-766-2043. You will be matched with an experienced mentor who will help you through the financial maze.

The service is free and the business support is ongoing for all facets of your small business.

Robert A. "Bob" Poor is a local small-business owner/operator. He is a small-business counselor and a regular contributor to the Ask SCORE column. Questions may be emailed to him at or sent by mail in care of The Herald-Mail, P.O. Box 439, Hagerstown, MD 21741, ATTN: Ask SCORE column.

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