A Melbourne bookkeeper explains balance sheets and income statements

Starting your own business is no easy feat. The title “business owner” comes with a lot new responsibilities and skills to master.

Case in point: bookkeeping.

Even if you don’t look after the numbers yourself (a good decision if you ask us), a basic understanding of bookkeeping essentials makes it easier to understand the financial side of your business.
Don’t know where to start?

Maximum Business Solutions is a Melbourne bookkeeper sharing some of the most important bookkeeping terms every new business owner should know: balance sheets and income statements, both of which form the foundation of bookkeeping and accounting.

Let’s start from the beginning: what’s a balance sheet?

Only the most important financial documents in your entire business, that’s what it is!

The balance sheet provides a broad snapshot of your entire business at a given point in time. It’s the undisputed king of financial reports, with every other report feeding into the balance sheet.

To understand and read your balance sheet however, it’s imperative that you understand the trifecta of assets, liabilities and equity.

When filling out a balance sheet, there’s one formula to keep in mind:

Assets = liabilities + equity 

If your numbers fit into that mold, then your balance sheet will be accurate. And if it doesn’t then you’d best set aside an hour or two to go through your accounts with a fine comb.

Take any entry-level accounting course and this usually the first thing you’ll go over. While basic, these three form the foundation of small business bookkeeping, so pay attention!

Assets – they’re more than you think!

Like the name suggests, assets refer to the objects or resources that the company owns as a result of a purchase or other transaction, including:

• Cash
• Inventory and stock
• Investments
• Real estate
• Machinery
• Office Equipment

That’s not all however!

Assets also includes anything you own that’s also expected to generate some sort of future financial return for you. For example, raw materials and ingredients generate a financial return once they’re converted into products.

That even extends to things like debts owed to you!

Liabilities

Liabilities on the other hand refer to anything that has to do with your business’ financial obligations.

To qualify as a liability, the obligation needs to arise from a past transaction and result in an asset (such as money) changing hands.

What qualifies as a liability?

• Taxes owed
• Unpaid invoices
• Wages owed
• Mortgage debt
• Bank debt
• Money owed to suppliers (accounts payable)

Equity

Unlike the other two, equity is harder to pin down.

Generally however, it relates to claims of ownership of a business. Simply put, it’s the part of the business that you own. That includes:

• Any contributions made to the business from personal funds (capital)
• Money withdrawn from the business for personal reasons (drawings)
• Net profit (everything that’s left after expenses and tax are taken care of)

Income statement: revenue, expenses, costs

For many, the income statement (the profit & loss sheet) is the most important measure of success in the entire business.

We don’t dispute that. This document is the bottom line – literally! It records your:

• Revenue
• Expenses
• Cost of goods sold (COGS
• Overall profitability

When you come across an income statement, you’ll no doubt encounter these terms. If you have no idea what they mean, you might find it difficult to understand how much money you’ve made – needless to say, they’re pretty important!

Revenue

This one’s pretty straightforward – it’s all the income your business earns not just from sellings its goods or services, but also transactions like selling off old equipment.

Costs

Now let’s talk about costs (aka cost of goods sold, or COGS).

COGS refer to the amount of money a business spends to manufacture or buy the services or goods it will be selling.

It’s important to remember that costs only refers to material inputs – overheads like labour and utilities are filed under expenses.

Expenses

Speaking of which, expenses are the costs incurred in running your business. That’s the key distinction: expenses are not directly connected with any products or services being offered.

This includes operating expenses such as:

• Wages
• Rent
• Advertising
• Utilities

Need help with your balance sheets?

Maximum Business Solutions is made up of a team of passionate business bookkeepers putting the fun back into bookkeeping (yes, it is possible!)

If you’d like to find out more, we invite you to browse the various bookkeeping solutions we offer.

Got any questions or want to catch up?  We would love to hear from you!

Give us a call on (03) 9589 0128 or fill in this form.