Types of Financial Reports

The Balance Sheet provides a summary statement of the firm’s financial position at a given point in time. It reports the business’ assets, liabilities, and equity. The statement balances the firm’s assets (what the organisation actually owns) against the way that the assets were financed. It gives a snapshot of the business’s overall worth.

Balance Sheets cover the following main categories:

• Debt - Money owed to banks and finance companies.
• Equity - Money and assets provided by the owners.

A balance sheet is broken into two main sections: assets on one side and liabilities and equity on the other side. This report uses figures directly from the trial balance. The two sides must balance, meaning they should be equal to one another. It reports the following line items:

• Current Assets - Assets that will be converted to cash within a year, including accounts receivable, inventory and prepaid expenses.
• Long-Term Assets - Assets that will not be converted to cash within a year, including land, buildings, and equipment.
• Current Liabilities - Debts owed within a year, including rent, utilities, taxes, and payroll.
• Long-Term Liabilities - Long-term business loans, pension fund liabilities.
• Shareholder’s Equity - A business’s net assets, including money generated by the business and donated capital.

This is how a balance sheet may look like:

Here is a video on how to prepare a balance sheet.

Income statements are also referred to as a ‘profit and loss statement,’ ‘statement of incomes and losses,’ or ‘report of earnings'. The Income Statement for a business provides a financial summary of the firm’s operating results during a specified period. Most common are income statements covering a one-year period ending at a specified date. This report uses figures directly from the trial balance.

An income statement reports the following line items:

• Sales - Revenue generated from the sale of goods and services.
• Cost of Goods Sold - Including labour and material costs.
• Gross Profit - The cost of goods sold subtracted from sales.
• Stock Gain or Stock Loss - Inventory items that have been purchased or otherwise lost.
• General and Administrative Expenses - Includes rent, utilities, salary, etc.
• Earnings Before Tax - The business’s pre-tax income.
• Net Income - The total revenue minus total expenses, which gives the profit or loss.

This is how an income statement may look like.

Here is a video on how to prepare an income statement.

The statement of cash flows or cash flows statement is a financial statement that summarises the amount of cash and cash equivalents entering and leaving a company. It shows the sources and uses of cash by operating activities, investing activities, financing activities, and certain supplemental information for the period specified in the heading of the statement.

Cash flow statements measure how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses. These statements complement the balance sheet and income statement.

There are two methods of calculating cash flows:

• Direct method - "Using actual cash inflows and outflows from the company's operations instead of modifying the operating section from accrual accounting to a cash basis" (Investopedia, 2020).
• Indirect method - "Uses increases and decreases in balance sheet line items to modify the operating section of the cash flow statement from the accrual method to cash method of accounting" (Investopedia, 2020).

The main components of the cash flow statement are cash from operating activities, cash from investing activities, and cash from financing activities.

This is how a cash flows statement may look like.

Here is a video on how to prepare statement of cash flows.

A statement of shareholder equity is a section of the balance sheet that shows the changes in the value of the business to shareholders from the beginning to the end of an accounting period.

This is an important report that tells how well the business is operating. It helps in making business decisions about whether to expand the business or cut costs. If this report shows a decline in the equity from one period to another, it means that there could be problems in the business operations. This report is also useful for investors to help them decide when to put in investments or add capital.

The components of the statement of stockholder equity may differ depending on the size of the business and how it operates. Here are some of the elements it can include: stock (common stock, preferred stock, treasury stock); retained earnings; contributed or shared capital; net income and dividends; and unrealised gains and losses.

This is how a statement of shareholders’ equity may look like.

Here is a video on how to prepare statement of shareholders' equity.

The trial balance is not a formal reporting requirement. It is generally used as a checking mechanism. It is a worksheet where all of the general ledger accounts with their balances are listed as either debit or credit. Remember, that for the most part, assets and expenses have a debit balance whereas liabilities, revenue accounts and capital have credit balances.

The figures from the trial balance are used to prepare the two major interim reports which are the Balance Sheet and Income Statement. These interim reports present figures from the trial balance in such a way that they show the position and performance of the business as a whole.

The trial balance is used to determine whether there are any gross errors in the books. This is because the total of all debits must equal the balance of all credits. If they do not equal, then errors must be found and corrected. This usually means carefully examining all the information in the books to locate where the error lies and checking all related documents.

Remember that the general ledger system is based on double-entry bookkeeping principles. This system of accounting ensures that both the debit and the credit sides of the accounting equation are always equal. If the trial balance does not balance, there is likely to be a problem in the journal or ledger entries that has resulted in the double-entry system being incorrectly applied.

Review and check for any deviances from original data that has been entered into the accounting system. In the case of manual bookkeeping, look for adding errors or other computation problems that may have caused the discrepancy.

The trial balance is useful because it is very quick to prepare, and immediately shows problems in the data. It also does not give much information, it simply provides a summary of the balances of each of the accounts which are later used to prepare the Statement of Cash Flows, Balance Sheet and Income Statement.

The general steps in preparing Trial Balance are:

1. Ensure that General Ledger is balanced.
2. Prepare or extract a trial balance with columns representing the accounts titles, the unadjusted trial balance amount, any adjusted entries, and the adjusted trial balance.
3. For every account in the General Ledger, record to the trial balance the account title and its corresponding amount in the appropriate debit or credit column.
4. Calculate the total of the amounts on the debit and credit columns.
5. Check to see if the total amount on the debit column matches the total amount on the credit column.
6. If there is any discrepancy in the amount, investigate, and rectify the errors.

Here is how a trial balance with adjusted entries may look like:

Each accounting period may include transactions that affect other accounting periods. In order to ensure that the organisation’s revenue and expenses align with the correct accounting period, day balance adjustments are used. It is also simply called adjusting entries.

Balance day adjustments are required for:

Depreciation of Assets

Assets are often expensive items such as computer hardware, office equipment, or vehicles, and the effective life will often extend over multiple financial reporting periods therefore at the end of each year the depreciation is recorded on the Income Statement under 'Other Expenses', and it is also recorded in the Balance Sheet.

In the balance sheet, depreciation is divided into three components:

• Historical Cost - The original cost of the asset.
• Accumulated Depreciation - The total amount of depreciation charged during the life of the asset to date.
• Carrying Value - The historical cost less the accumulated depreciation.

Each year that the asset is owned the accumulated depreciation portion will increase until the value is completely used up (or reaches is residual value amount) and the asset is disposed of.

A budget is a plan of anticipated income versus likely spending. A detailed budget helps to ensure funds are allocated for particular items and activities and that all obligations are met.

A budget does three things:

• Forecasts Income and Expenditure - When operating a business it is vital that income is received to cover all expenses. Anticipating or forecasting expected income and expenditures is an important element of budgeting.
• Provides a Decision-Making Tool - The budget provides a framework to help with the decision-making process. Decisions that may need to be made include the type of resources that are purchased, how many the company can afford, when it is appropriate to make these purchases, and which expenses must be paid first.
• Provides a Means to Monitor Business Performance - By measuring the forecast against the actual performance variances can be seen and remedied and hopefully, any shortfalls can be avoided in the future.

A budget needs to include all income streams as well as all known expenditure outgoings, including:

• Wages - Will vary for different staff types - Permanent, Part-time, Casual, Contractors.
• Taxation - PAYG, GST etc...
• Insurance - Personal and Professional Indemnity, Workcover, Building and Contents Insurance, Car Insurance.
• Office Rent - May be paid weekly, fortnightly or monthly.
• Utilities - Telephone, Electricity, Internet etc...
• Office Supplies - Paper, Toner, Stationery items, Lunchroom supplies etc...
• Equipment Rental - Photocopier / Printer / Computer leasing.
• Staff Professional Development - Conferences, Training Courses etc...
• Travel - Airfares, Car hire, Petrol, Accommodation, Meals whilst travelling, Tolls.
• Miscellaneous - This can be a set amount set aside for any unexpected or irregular expenses.

Businesses may generate other types of financial reports necessary to track their financial or business standing. These reports will provide important detail that can be used to help develop future forecasts, marketing plans, guide budget planning, improve decision-making, plan tax payments, or use it as an audit trail of the business. Some special reports may also be generated in compliance to government policies.

Bank Reconciliation Statement

Bank reconciliations should be conducted at regular intervals to ensure that the company’s cash records are correct. It also helps in detecting fraud and any cash misappropriations. After recording the necessary adjustments and journal entries, a bank reconciliation statement should be produced to reflect all the changes to cash balances for each month. This statement is used by auditors to perform the company’s year-end auditing.

A bank reconciliation statement is an important document used to compare the cash balance on a company’s balance sheet to the corresponding amount on its bank statement.

Here is an example of a Bank Reconciliation Statement:

Business Activity Statement

A Business Activity Statement (BAS) is a form that businesses must submit to the Australian Taxation Office (ATO) in order to report and pay their tax liabilities.

The BAS form essentially reports the goods and services tax (GST) amount that a business has collected on sales minus any that has been paid on purchases, with the difference being the refund or what is owed to the ATO.

BAS can also include PAYG withholding and instalments, wine equalisation tax, fuel tax credit and fringe benefits tax (FBT) if these apply to the business.

A large part of BAS is related to GST. For example:

• The business charges $70 for goods or services so the customer will be charged $77. The additional $7 is the 10% GST that needs to be paid to the ATO.
• The business buys supplies and is charged 10% in GST which can be claimed back from the ATO as a credit.

The BAS form can be prepared manually using the GST calculation worksheet or in accounting software with the BAS feature. Here are the general steps in preparing BAS:

• Prepare all the needed information to complete the BAS form.
• Reconcile the accounts to ensure that all information is accurate and up-to-date.
• This involves collating all business transactions such as receipts, invoices and other relevant documents.
• Ensure that the accounting information has no discrepancies.
• Calculate totals and enter correct figures on the BAS form.
• Lodge the Business Activity Statement to ATO.

Click the link to view or download ATO GST calculation worksheet: GST calculation worksheet

There are three main ways to lodge the BAS:

• Mail a hard copy of the BAS form to the ATO. The ATO will send the Business activity statement form with a pre-addressed envelope to send it back.
• Lodge BAS statement online through the ATO’s Business Portal.
• Engage a BAS or Tax agent lodge the form on behalf of the business.

To lodge a BAS on the ATO business portal click here: ATO Business Portal

Example of how to prepare BAS using MYOB:

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