Usefulness of balance sheets and income statements

The balance sheet will describe the value of the business at any given time. It thus gives indications to potential investors and shareholders on the use of resources. In addition, it makes the company’s figures “valid” and also demonstrates the company’s creditworthiness. Finally, it can be used to calculate its working capital, its need or its debt ratio.
The income statement will show the financial performance of the business over a specific period (usually one year). It will show the receipts, as well as all the expenses (purchase, salaries, depreciation and others) which were carried out during this period of time. It thus provides an indicator of the company’s financial health and short-term profitability.

The Balance Sheet

A balance sheet is made up of two distinct parts: assets and liabilities.
Assets are the assets of the business and are generally divided into two parts: current (short-term) and fixed (long-term) assets. Current assets include liquidity (bank, cash), inventories and receivables from customers. Fixed assets are divided into 3 parts: tangible (buildings, machines, vehicles), intangible (patents, software, goodwill) and financial (securities, loans, mortgages). At the level of the chart of accounts, assets represent the number 1.
Liabilities are debts that the company owes in the short or long term and which will cause a decline in the value of the company. The division of liabilities shows the distinction between short and long term. In the short term we have supplier debts, VAT due, bank debts as well as provisions. In the long term, there are loans, mortgages (debt) or even bonds. They are represented by the numbers 20 to 26 of the chart of accounts.

Equity is a part of the liabilities that group together the capital of the company, as well as its results, its reserves and the subsidies. They represent the figures 28 and 29 in the accounting plan.

Here is a simplified example of a corporate balance sheet. It is possible to add the previous year to it, in order to be able to compare one year with another in order to analyze the evolution of the various items of assets and liabilities. In addition, elements must be added, depending on the nature and organization of the company. If an account has received movements, it must be put on the balance sheet. We can imagine here financial fixed assets, such as securities held by the company or even loans, reserves that can be divided according to the type constituted or even VAT, tax or dividend items that can be found in the short-term debts.

The income statement

The income statement consists of the income and expenses recorded over the year. The revenue is an increase in the wealth of the business and the expense is the decrease in the wealth of the business as a result of the payment of various invoices. The products are represented by the number 3 in the chart of accounts. The charges represent figures 4 (material and third party charges), 5 (personnel charges) and 6 (other operating charges, depreciation, etc.).

We have here a simplified income statement with first the income, then the various expenses divided according to the chart of accounts. It is possible to add others depending on the nature and activity of the business. As with the balance sheet, it is also possible to add the previous year to it. It should be noted that the operating result is found on the balance sheet under shareholders’ equity under profit for the year.

We have seen in this article the usefulness of balance sheets and income statements which show the value of a company as well as its performance over a given period. Then, we organized a balance sheet and an income statement (simplified) in order to notice the divisions of the elements of the financial statements (assets, liabilities, etc.) in order to make more tangible the links between the chart of accounts and the final documents of the accounting.

This is not in any case a call for the investment