Previous Posts:
Accounting for Kossaks (pt 1) - Intro, Balance Sheet, Assets, Liabilities, Equity
Accounting for Kossaks (pt 2) - Debits, Credits, T Accounts, General Ledger
Welcome back!
In the last two posts, we've given the basic overview of the balance sheet and the asset, liability, and equity accounts it contains. We've shown how to record transactions using double-entry bookkeeping by recording journal entries that show which accounts get debited and credited with each transaction. How about all that bolding, eh? Anyway, now we can more-or-less see the financial position of a company at a point in time using the balance sheet.
But what if we want to see how a company has done over a period of time? Well, that's what the income statement is for. During the course of a reporting period (usually a quarter or a year), two accounts get created and destroyed. The first account is called Revenue. It is an account that has a credit balance, and tracks all of the gross sales we make during the period. The other account is called Expenses - a debit-balance account. This is the account that keeps track of all of the company's expenses during the period. At the end of the period, we'll net the two, pay taxes on any excess, and dump the remainder into a new equity account on the balance sheet called retained earnings.
On a side note, knowing how a company is doing over discrete periods of time is very important, because these days, most corporations are owned by shareholders - who change over time. We need to know how the company is performing during the time that a shareholder owns the stock so that the company can pay the shareholder an appropriate dividend for the money the company is making while that shareholder owns the stock.
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