When you own a business, you need to know whether it is doing well or not.   A business can use what we call financial statements to decide if the company is doing well.  Financial means having to do with finances or in other words--MONEY!!  Learning how to read financial statements and understand what they mean takes practice, time, and knowledge.  Here are some financial-type words that you will hear often in a business and will need to know the meaning of:

Balance Sheet: A financial statement that shows assets, liabilities, and owner's equity

Assets: Items or possessions which the business owns.

Liabilities: Money that the business owes to someone else.

Balance Sheet Formula or Equation:
Assets = Liabilities + Networth (Owner's Equity)
OR
Net Worth (Owner's Equity) = Assets - Liabilities

Accounts: Any single item or entry used on a financial statement or used in record keeping in a business.  For example, if you charge some paper at Carpenter Paper Co., you would have an account payable titled "Carpenter Paper Co."  If you kept track (which you should do) of your advertising expenses, you would title this "account" Advertising Expenses.

Net Worth: The amount of money a person has to use to start a business.  It includes any profits made less any withdrawals.  Net Worth is also known by other  names.  It is also called "Owner's Equity," "Owner's Capital," or "Working Capital."

Petty Cash: An amount of cash that the business has on hand in the store.  It is usually kept in a cash register or a cash box.

Inventory: The amount of materials the company has available to use.

Accounts Receivable: The money that different customers owe to your business (charge accounts).

Accounts Payable: The money that your business owes to other companies (you have charged purchases with them).

Accrued Expenses: Expenses that have not yet been paid such as earnings or wages of employees that haven't been paid yet, or payroll taxes that haven't been paid to the government yet.

Take a look at the balance sheet below.  Notice where the assets, liabilities, and net worth parts are places on the balance sheet.  Does this balance sheet balance (refer back to the definitions)?  What do you think it means when we say "the balance sheet balance?" (Write these questions and answers on a separate piece of paper)

Let's see if you understand everything so far!  Below is a list of items that could be classified as assets, liabilities, or owner's equity.  On the separate piece of paper where you answered the questions above, write the item, and put an "A" in front of the item if it is an asset; put an "L" in front of the word if it is a liability; and put  "OE" in front of the word if it is owner's equity.

Below is a list of assets and liabilities.  On your separate sheet of paper, find the networth of equity by listing assets and liabilities separately and then applying the balance sheet equation.

Furniture Owned--$3,000; Money Owed to Creditors--$4,000; Money Owed by Customers--$2,500; Cash on Hand--$1,000; Delivery Trucks--$10,000.

The Income Statement (A financial Statement)

What about sales (or income)?  How do you know how Utah Lumber Company is doing in this area?  Before we look at the sales (income) area, let's study some other words first so you will know what you're looking at.

Income Statement: A financial statement which shows sales or income and expenses.

Gross Profit: The amounts of money the business takes in before expenses are subtracted.  The Cost of Sales, however, has been subtracted.

Cost of Sales (or Cost of Goods Sold): The amount of money the business has to pay for the materials or goods it sells.  At Utah Lumber Company, we have to pay the Forest Service for the logs we take out of the forest.   Sometimes we also purchase lumber because it is a different specie than we log ourselves and all of these purchases are our cost of the goods (lumber) we sell.

Expenses: The items that the business has to spend money on: rent, utilities, salaries, advertising, travel expenses, etc.

Interest Expense: The extra amount the business must pay in addition to the money it borrowed--the cost of the loan.

Net Profit: The money the business has made after all expenses and costs have been subtracted.

Can you tell if something is income or an expense?  On your separate piece of paper, write down the following words.  Write an "I" in front of the word if you think it is income.  Mark an "E" in front of the word if you think it is an expense.

Take a look at the Income Statement for Utah Lumber Company shown below.   Notice how the income and the expense parts are shown.  Did the company make a profit or a loss for the month of June (write your answer on your separate piece of paper)?

Get the sheet from the Accounting Training Manual & Tutorial folder that has a balance sheet and income statement on it.  Write in the dollar figures shown below by the correct items on both forms so that UTAH LUMBER COMPANY'S financial statements balance.  I have written in the totals, so your numbers need to add up to those numbers.

You will need to place these numbers in so that they equal the totals that have been written in.  As you probably can tell there can be several different answers.