Quick questions on Financial Statements for a Business - TCE Accounting (Tasmania)

The income statement measures profit for a period (for example, a year). It applies the matching principle: revenue earned in the period is matched against the expenses incurred in earning it.

The balance sheet lists what the business owns and owes at one date. It is a direct presentation of the accounting equation, $Assets = Liabilities + Owner's\ Equity$. Items are classified to make the report more useful:

A well-presented income statement groups items so the reader can see the layers of profit. Net sales (sales less sales returns) come first, then cost of goods sold gives gross profit. Operating expenses are usually grouped, for example into selling and distribution, administrative, and finance expenses, so a reader can see where profit is consumed. Finance costs such as interest are typically shown last because they relate to how the business is financed rather than to trading.

The balance sheet is classified into current and non-current items so users can judge liquidity. A standard order lists current assets (cash, debtors net of any allowance, inventory, prepaid expenses), then non-current assets (equipment and vehicles shown at cost less accumulated depreciation to give carrying amount). Liabilities split into current (creditors, GST owing, accrued expenses, bank overdraft) and non-current (long-term loans). Owner's equity shows opening capital, plus net profit, less drawings, to give closing capital.