Making A Profit

Accountants are responsible for preparing three primary types of financial statements for a business. The income statement reports the profit-making activities of the business and the bottom-line profit or loss for a specified period. The balance sheets report the business’s financial position at a specific time, often the last day of the period. The statement of cash flows reports how much cash the business generated and what the business did with this money.

Everyone knows profit is a good thing. It doesn’t sound like such a big deal. The key is to make more money than you spend to run your business. But of course, nothing’s ever really simple. A profit report, or net income statement, first identifies the business and the period summarized in the report.

You read an income statement from the top line to the bottom line. Every step of the income statement reports the deduction of an expense. The income statement reports changes in assets and liabilities as well. If there’s a revenue increase, it’s either because there’s been an increase in assets or a decrease in a company’s liabilities. Suppose there’s been an increase in the expense line. In that case, it’s because there’s been either a decrease in assets or an increase in liabilities.

You often see net worth in the business, also called owners’ equity. They’re not exactly interchangeable. Net worth expresses the total of assets less the liabilities. Owners’ equity refers to who owns the assets after the liabilities are satisfied.

These shifts in assets and liabilities are significant to owners and executives of a business because it’s their responsibility to manage and control such changes. Making a profit in a business involves several variables, increasing the amount of cash that flows through a company and the management of other assets.