Financial statements are a set of management-prepared reports that present a business's financial situation. There are many different documents that comprise a financial statement, two of the most important being a statement of comprehensive income and an income statement.
Income Statement for a Business
An income statement, also called a profit and loss (P&L) statement, shows the businesses's revenues (the amount of money a business receives from selling goods or services) and expenses (the amount of money a business spends, such as in rent, wages, and utilities) during a specific period of time, usually monthly, quarterly, or annually. To calculate the net income or loss of the business, subtract total expenses from total revenues. If revenues exceed expenses, the business is profitable; if expenses exceed revenues, the company is unprofitable.
Statement of Comprehensive Income
A statement of comprehensive income is a separate financial statement that follows the income statement and covers the same period of time. The income statement and the statement of comprehensive income can be combined into one continuous financial statement. The statement of comprehensive income includes the net income off the income statement and other comprehensive income, which includes items that haven't been realized yet. This means the events have occurred but haven't been monetarily recorded because they haven't yet been earned or incurred.
For example, your business might buy five shares of stock in another business for $20 a share. The purchase price of $100 is recorded on the balance sheet. A few months later, the stock is worth $40 a share, or $200 total. Until the stock is sold for $200, the business cannot record the $200 as additional income on the balance sheet and must continue to list the stock price as $100. The items on the balance sheet, such as the shares of stock, don't reflect the actual value of the assets. Other examples of comprehensive income include:
- Unrealized gains or losses on available-for-sale securities
- Unrealized gains or losses on other financial investments
- Unrealized gains or losses on pension and retirement benefit plans
- Foreign currency adjustments
The totals from each section are added together and presented as comprehensive income. This amount is then transferred to the balance sheet and listed as other accumulated comprehensive income.
Understanding a statement of comprehensive income is important because income versus comprehensive income only recognizes revenues and expenses when they are incurred, leaving off sources of revenues and expenses that have not yet been realized. When creditors or investors review a business's financial documents, they want to know how this affects equity, or the value of the assets minus liabilities.
Budgeted Income Statement
A budgeted income statement contains the items found on an income statement. The difference between an income statement and a budgeted income statement is that the latter is a projection of what the income statement will look like in the future based on the projected financial outlook of the business. That makes a budgeted income statement a useful tool for comparing all the budget periods at one time to spot any anomalies.
Financial statements help you understand and track your money on a monthly, quarterly, and annual basis. If you need help preparing your company's annual reports or other financial documents, consider using an online service provider to help you get your business on track and out of the weeds.