Basic Accounting Principles for Real Estate Professionals
A balance sheet is a quick picture of the financial condition of a business at a specific period in time.
Your business activities fall into two separate groups that an accountant reports over a specific time. They are profit-making activities, which include sales and expenses. You also see profit-making activities called operating activities. There are also financing and investing activities that include securing money from debt and equity sources of capital, returning capital to these sources, making distributions from profit to the owners, making investments in assets, and eventually disposing of the assets.
The income statement reports on profit-making activities, while the cash flow statement contains the financing and investing activities. These are two different financial statements prepared for the two different types of transactions. The statement of cash flows also calculates the cash increase or decrease from business operations during the year – which often differs from the amount of profit reported in the income statement.
The balance sheet is different from the income and cash flow statements. The balance sheet represents the balances, or amounts, or a company’s assets, liabilities, and owners’ equity at a point in time. The word balance has different meanings at different times. Accountants use the term “balance sheet” because it refers to the balance of the two opposite “sides” of a business, total assets and total liabilities on the other. The balance of an account, such as the asset, liability, revenue, and expense accounts, refers to the amount after recording increases and decreases in the account, just like the balance in your checking account. Accountants can prepare a balance sheet any time that a manager requests it. But they’re generally prepared at the end of each month, quarter and year. Accountants usually prepare the balance sheet at the close of business on the last day of the profit period.
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