Introduction to Accounting and Financial Statements Part 1

Accounting, like other economic sciences, is a language of business. It helps owners understand the money coming in and out of their business. It also makes them understand profits, debts, and losses.

Financial statements are not just a bunch of complex numbers; they are a science that helps businesses make future decisions. They determine applications for loans and help businesses avoid mistakes. They basically make you understand whether the business is healthy.

Let us start by working on two examples of financial statements: Income Statement and Statement of Financial Position. Part 2

An Income Statement shows Profit or Loss for the year. By just having a look over it, you should be able to know if there is a profit or loss.

First, it contains Sales Revenue, which is basically whatever the business sells or makes, whether it is a product or service offered.

As you expect, we always say with the word sales: costs of production, exactly! We have to subtract the Cost of Sales in order to get our Gross Profit. Gross Profit is the difference between Sales Revenue and Cost of Sales.

But wait, is that all the revenue made? Well, if a business sells plastic bottles, for instance, would they receive revenue from something other than selling plastic bottles? Yes, they would! For instance, what if this business has some land that they are not actively using and they are renting it, or they helped make a partnership between another business and a landfill site? They would receive a commission or rent.

In accounting, we call them Commission / Rent Received, which means the business received them, not paid them. So that is why we add something called Other Revenue / Income, which is revenue gained not from the primary activity of the business.

Just like the other revenue, we subtract other expenses: expenses that are not directly used in the cost of production of the goods or service. For instance, rent, electricity, wages, and salaries paid. All of these are examples of things the business has to pay in order to keep running.

1. 1Start with Sales Revenue.
2. 2Subtract Cost of Sales to get Gross Profit.
3. 3Add Other Revenue or Other Income.
4. 4Subtract Other Expenses.
5. 5The final result is Profit or Loss for the year.

• Thinking financial statements are only complex numbers.
• Confusing Sales Revenue with Other Revenue.
• Forgetting to subtract Cost of Sales before calculating Gross Profit.
• Confusing expenses paid with income received.

• Accounting is the language of business.
• Financial statements help businesses make future decisions.
• An Income Statement shows Profit or Loss for the year.
• Gross Profit is Sales Revenue minus Cost of Sales.
• Other Revenue is income earned from activities outside the main business activity.