CHAPTER 7: ACCOUNTING, RECORDS, AND ASSOCIATED REGULATIONS
7.6 Financial Statements
BALANCE SHEET A company’s balance sheet comprises three parts: 1. Assets—total of what the company owns, such as cash, accounts receivable, furniture and fixtures, prepaid expenses, inventory, etc. 2. Liabilities—total of what the company owes, such as accounts payable, loans, accrued employment expenses, deferred income, etc. 3. Owner’s equity (net worth, retained earnings, shareholders’ equity or net assets). This is the total assets minus total liabilities of an individual or company. It represents the residual equity of a business after deducting all expenses.
Subtracting liabilities from assets equals equity, or as the balance sheet reflects: Equity = assets – liabilities.
INCOME STATEMENT The income statement (also referred to as profit and loss statement, earnings statement, or statement of operations) is a snapshot of how the company is doing at any given point in time. The income statement includes the revenue that the company has brought in during a specific time period compared to the corresponding expense that has been accounted for. The difference between revenue and expenses is considered net income, often referred to as the “bottom line”, based on its position on the income statement. The purpose of the income statement is to show whether the company made a profit or a loss during the period. While income statements are issued periodically, the year-end income statement shows the net profit or loss for the year.
An income statement represents a period of time, such as one month, several months, or one year, whereas a balance sheet represents a single point in time.
7.7 Auditing—Internal and External
INTERNAL AUDITING The Institute of Internal Auditors (IIA) offers the following description of the role of internal auditors: “Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.”
In the past, the audit department was typically limited to the identification and communication of routine problems.
134
THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
Made with FlippingBook - Online catalogs