Why Does A Business Prepare An Income Statement And A Balanced Sheet At Its Financial Year End?


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Steven Vakula answered
The financial statements reflect very different, yet related information and operation of a company. The income statement reflects the Income and Expenses of an organization for a period of time. This period is most likely the one year period from the start of the companies fiscal year to the end of the fiscal year. This information will summarize what the company generated in income less what the cost of the goods or related expenditures that are directly related to the production of this income. This expense category is commonly referred to as "Cost of Goods Sold". These are the expenses that must be incurred in order to produce the product or service which generated the income. This Net Profit/(Loss) is then further adjusted for both tangible and intangible costs that are a common and ordinary  expense of operating the company and these items are usually referred to as "General and administrative expenses". This will include actual money that is spent and also usually the recognition of the expiration of useful life items such as fixed assets and intangible assets. It will also include the cost of borrowing money, administrative and professional fees incurred and related items that will tell the management and investors or shareholders how the company is performing during a operating period. The balance sheet represent the companies operations from it start. It reflects items purchased, debts incurred to operate, payables and short-term (payable within one operating cycle) and long-term notes and mortgages payable as well as shareholders loans, partner loans and other short-term and long-term liabilities including taxes if any are owed. It also reflects what the basis of investment that the owners or shareholders of a company initially and subsequently may have invested for their ownership and also the cumulative results of operations as well as the current profit or loss of the business for the operating period. So the balance sheet represent and reflects what the company has done since it began and the income statement reflects what the company is either making or loosing for the current operating cycle or s specific period of time.

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