Financial statements are a summary of revenues, expenses, assets and liabilities for a period of time.  Revenue is money received from the sell of business products and services; expenses are costs paid to operate the business; assets are anything owned by the business that can be exchanged or sold for value; and liabilities are claims on the business assets.  For example, a lawn care business would collect revenue from cutting grass and snow removal; expenses might be paid for gas need to operate equipment and insurance on the equipment; the trucks used to haul the lawn equipment is an asset; and the monthly payment on the loan used to purchase the lawn equipment is a liability.

Revenue of a non-profit organization might include, contributions, donations, and grants; expenses might include salary and wages of employees, rent for office space, and fees for telecommunication services; assets might include computers used to carry out the exempt purpose of the organization and stocks and bonds held in investment accounts; and liabilities might include accounts payable, notes payable, payroll and income taxes.

The primary and basic financial statements are income statement and balance sheet.  The income statement is also called the profit and loss statement because by subtracting all of the expenses from all of the revenues it shows whether the business is operating at a profit or a loss.  An income statement is prepared by listing the categories of products and services that generate revenue and listing the categories of expenses paid to produce the revenues.  For example:

Revenues                                                 Expenses                                                  Profit/Loss

• Grass cutting              $4,000              Gasoline                      $2,000                $2,000
• Mulching                     $1,500               Labor                           $   700                 $   800
• Snow removal            $3,000               Labor                           $1,000                $2,000
• Contributions             $10,000            Officers salary            $4,000               $6,000
• Gov grants                   $12,000            Internet fees               $2,800               $9,200
• Investment income   $      800            Accounting services  $2,500                $1,700

A balance sheet is a summary of assets, liabilities, and owner’s equity for a certain period of time.  Owner’s equity is the value of the business over a period of time.  A balance sheet is prepared by listing all the assets in one column, all of the business liabilities in another column, and the difference between to two is the owner’s equity.  For example:

Owner’s equity or                  Assets                                                       Liabilities                                               Net Assets

•  Bank balance             $4,800               Accounts payable      $1,100                 $3,700
•  Equipment
  •  Truck                 $9,000              Note payable              $4,000                $5,000
  •  Mowers                4,000              Note payable                 2,000                  2,000
  •  Trimmers             1,000              Note payable                      -0-                   1,000
  •  Trailer                   1,800              Note payable                    400                   1,800
• Bank balance              $16,900             Donations                    $12,900               $  4,000
• Computers                  $  4,000             Note payable               $  1,200                       800
• Bonds                           $20,000            Investment fees          $     -0-                   20,000
• Stocks                           $50,000            Investment fees          $  2,000                 48,000

Financial statements should be prepared by a bookkeeper, accountant or responsible and trustworthy employee monthly, quarterly, and annually.  After preparation, the financial statements should also be reviewed, analyzed, and compared to each other for better understanding of the business operations.

Small and mid-sized for-profit businesses and non-profit organizations can AAQ to learn about preparing your financial statements.