In a financial scorecard, the left side always equals the right side. A loan is called notes payable, what you
have is cash, which is also called assets, which is the heading of the left side. People that the business owes
money to are the ones to whom the business is liable to. So the top part of the right side, is called liabilities.
Account payable: liability
Account receivable: asset
The part of the business owned by the owners can be called: equity, owner’s equity, stockholders’ equity or
net worth. So, the right side consists of two parts:
- Liabilities (what you owe others)
- Owner’s equity (what is yours)
ASSETS = LIABILITIES + OWNER’S EQUITY
Scorecards are like snapshots because they give an image of where a company is at NOW. Inventory is a
term for the raw materials, goods in process and finished goods that a business plans to sell. An inventory is
an asset. So, even if you exchange one assets for another, the total asset will remain the same, same as
liabilities and owner’s equity.
A business has to charge more than it costs them, but still not as much to scare customers. The money you
make is called profit or earnings, to figure out the earnings you need to subtract the cost of goods sold (what
is the cost to make) from your sales (the money brought in by selling), and the result is gross profit (the
earnings so far).
SALES - COST OF GOODS SOLD = GROSS PROFIT
The earnings week to date add to the owner’s equity section.
Expenses are the costs of doing business other than those related to producing your product. Expenses have
to be paid regardless of how much is made or sold, things like rental fees, advertising, rent and other things
not directly related to the cost of making the product, are in this category. Expenses are taken out from the
cash section, so expenses reduce earnings, thus it is needed to reduce earnings week to date by the amount
you have incurred as expenses in that period.
The left side shows the assets so the things and stuff, the right side shows liabilities and owner’s equity.
Liabilities represents people you owe money to and
owner’s equity is what you own, as the owner of the
business, so the right side represents the people.
, The purpose of the balance sheet is to connect people, it shows the things you have in your business and
then it connects the things you have to the people who own or have a claim on those things. Normally
balance sheets are not filled out every single time a transaction happens, it depends on the business. Banks
(who deal with a lot of money) do it on a daily basis, but other business do it weekly, monthly, quarterly or
yearly. A year is considered to be the basic accounting cycle.
- Does the balance sheet show what the sales for the week were? No
- Does it tell what the cost of goods sold is? No
- Does it tell how much inventory you bought and sold? No
- Does it tell you how much you paid for all your expenses? No
- Does it tell you how you made your earnings? No
- A business needs to know all the above, what do you do? Create another scorecard
A balance sheet shows us a moment in time, like a snapshot, but we need for our second scorecard to give
us a record of events happening over a period of time. Events like buying inventory, making your product,
selling it, and incurring expenses are happening over time. So, we need a financial scorecard that acts like a
motion picture, it will cover a period of time and shows motion and has a beginning and an end. This can be
called: operating statement, income statement, or Profit & Loss (P&L) statement.
- Balance sheet: snapshot (pretty big picture, short on details)
- Income statement: movie
The income statement shows sales, and to generate those sales, the costs of goods sold is the name for what
it costs for goods sold. The cost of goods sold only relates to our product, if we subtract out the cost of goods
sold from sales, we get gross profit.
SALES - COGS (COST OF GOODS SOLD) = GROSS PROFIT
It is called gross profit because the costs of doing business have not been taken out, an example of “costs of
doing business” are expenses. So, expenses are the cost of being in business, regardless whether or not we
sell a single product.
SALES - COGS (COST OF GOODS SOLD) = GROSS PROFIT
GROSS PROFIT - EXPENSES = NET PROFIT
The net profit is also called the bottom line. The income statement separates costs into two categories:
- Costs of goods sold (for all the costs of producing our product)
- Expenses (for all the non-production costs of running the business)
For a business that does not have a tangible product (service business), the two categories are:
- Cost of sales or Cost of services
- Expenses
The purpose of the income statement is to keep track of sales minus cost of goods sold, which gives gross
profit. Then, we subtract all the other expenses which gives the net profit (bottom line). So, earnings, net
profit, net income and bottom line, are all the same.
An income statement, like a motion picture, has a beginning and an end. This length of time, whatever the
length, is called the accounting period. Business create a general ledger, which is a moment by moment
record of every thing that happens. To do this, they use a software programmed to create categories for each
item and sums them for financial statements.
What is not sold is called ending inventory, since it did not sell, it cannot be counted as a part of the cost of
goods that got sold.
