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As a company owner, you need to comprehend the relationship between the financial statements (Also see Introduction to Financial Statements) so that you can analyse your company’s financial status effectively. The financial statements appear in various pages of the company annual report, and the connections between the statements are not clearly stated. Hence, let’s discover the relationship between the income sheet and the balance sheet. (Also see Basics on Balance Sheet )

You will see the relationship between the income statement and the balance sheet when recording an expenditure or a sale using double-entry accounting. (Also see What is Double-Entry Bookkeeping?) In double-entry accounting, if sales increase, liability will decrease or assets will increase, whereas costs will reduce assets or increase liability.

This suggests that one side of every sale entry or expenditure is recorded in the balance sheet, and the other side is recorded in the income statement. Thus, the income statements and the balance sheet are inseparable but reported individually.

To comprehend the relationship between an income statement and a balance sheet, think about the following.

1. Your company requires to keep a working cash balance if you make sales and incur expenses in making the sales.
2. Credit sales that are recorded in the income statement creates accounts receivables (Also see What are Trade Receivables and Non-trade Receivables?) in the balance sheet.
3. To make sales (which is recorded in the income statement), your company should have inventory (which is recorded in the balance sheet).
4. To obtain inventory, you need to buy goods on credit and this produces account receivable.
5. Depreciation is recorded in the balance sheet and also in the accumulated depreciation contra account in the income statement.

The operating expense (which is recorded in the income statement) is a broad category selling, general expenses and administrative. These expenses appear in many accounts in the balance sheet, such as the accrued expenses account, accounts payable, and more.

From the relationship between the income statement and the balance sheet, we know that every income or expense recorded in the income statement appears in the balance sheet. Therefore, here is a new question, is the income statement the same as the balance sheet?

A balance sheet shows the company finances at one particular time. It consists of three reports that are liabilities, assets and owner’s equity. On the other hand, the income statement reveals all of your company’s incomes and expenses. Its primary goal is to determine the cash flow generated or lost by your company in a given duration.

If you are still uncertain about the relationship between the income statement and the balance sheet, please seek guidance from accounting service in Singapore .

Importance of Statement of Comprehensive Income

Statement of Comprehensive Income, also referred to as profit and loss statement ( Also see Profit and Loss Account ) is one of a deliverable you could receive from an accounting service in Johor Bahru. It offers you a summary of your company’s profitability and the direction the company is heading.

Business owners ( Also see Characteristics of Successful Business Owners) would wish to know where their money goes. A Statement of Comprehensive Income is an efficient method of identifying how and where you use the money.

This statement assists a company in evaluating development by summarizing records of profits and losses over a duration, which will provide information to the stakeholders, owners and the management. This could either be prepared monthly, annually or quarterly.

Such records are essential because these are useful in identifying areas or items that the business invests the majority of its resources. It is much easier for the business to work on methods and ponder on alternatives to reduce or minimize the expenditures. For instance, if a company spends most on phone calls, a plan can be made with the service providers to obtain the best deals.

This statement enhances the transparency of business where the stakeholders and the public could access to the financial status of the company when reading together Cash Flow Statement. (Also see Bookkeeping – Cash flow Statement) Such a report also plays a significant role in persuading investors.

In loan, the majority of lenders would wish to read the Statement of Comprehensive Income along with the Statement of Financial Position (Also see Introduction to Financial Statements) , which is the balance sheet of the company. This is a long journey to advice on the business’s capability to repay, and if the financial investment is economically viable.

The Statement of Comprehensive Income is one of the beginning point or the source for an audit task. Clear records make it simpler to explain the financial engagements of any companies to auditors.

The Statement of Comprehensive Income makes it possible for businesses to prepare useful and precise forecasts. Projections are important in every business; it assists the company in protecting itself from preventable losses. Allocations could be made according to the records from the statements.

Nowadays, it looks like every person owns a dream of becoming a business owner (Also see Characteristics of Successful Business Owners). A lot of people think that start running a business on your own is an attractive way of life that shows the greatest freedom. Before you jump into entrepreneurship too soon, you have to ask yourself some questions to make sure that becoming a business person is the appropriate way of living for you.

What type of business do I want?

It is time for you to start thinking about the types of business you intend to handle. Find out an area where there is a requirement or a demand, then register a company that fulfil those clients. Starting a business is not regarding you and the things you like. You are not going to earn money if you only want to set up a firm to boost your pride. Your clients are only concern about how can your service provide them with the solutions they need.

How much money do I require?

Money is one of the most vital elements for all firms. The sum of profit your business can generate determines whether your company will sustain and grow. The fundamental areas that you will have to make an investment in are your service or product development as well as advertising and marketing. You want to begin generating income as soon as possible to ensure you can invest in the development of your company.

What are the taxes that I need to pay?

The legal structure you selected, the location of your business, as well as the revenue and expenditures you have incurred within a financial year will affect the taxes you need to pay. You must document all the transactions of your firm. You will not want to see a lien being placed on your business due to the unpaid taxes. As a startup, you should engage an accounting firm in Johor Bahru to manage your taxes and accounting so that you can spend more time on the core functions of your business.

Who are my target clients?

It would be best if you never thought that everyone is your client. All companies should develop themselves so that they are capable of serving a particular customer base who possess particular wants and needs. Identify whether your customers will be those who think that prices are more important or those who pay more attention to the value of the products and services you offer. If you are aware of this fact, you will be able to develop an advertising and marketing approach that functions to entice your preferred customer.

What are the services or products my business will offer?

It would help if you did a proper investigation about your clients so that you get to know the best way of serving their wants and needs. It is better to inquire about your target market straight away about what kind of products or services they will buy. Acquiring this information enables you to develop a service or product, which is highly possible to be purchased repeatedly.

You have to put in a lot of effort if you want to handle a company on your own. Before starting your business, you need to accomplish a great deal of work to make sure that your company is going to be successful (Also see How Can Bookkeeping Services Indicate Business Health?). If you think that you have prepared yourself to realise your dream of becoming an entrepreneur, be ready to work extremely hard to make your firm a successful one.

The inventory cost stands for the cost you need when you keep the goods in stock. People often express it as a percentage of the value of inventory (Also see Financial Reporting Standards 2 Inventories). The management can calculate this cost to identify how much inventory they should keep with them. It comprises of the ordering costs (the related expenses when you order the goods), holding costs (the associated costs when you store the products), administrative costs, cost of money, costs of space, as well as the cost of obsolescence.

Ordering Costs

Another name for ordering cost is the setup cost. These costs comprise of the salaries and incomes of the procurement personnel, overtime (if any), related benefit, taxes, as well as other expenditures. If a company needs to pre-qualify a new vendor before he can supply products to the company, the expenses may include the cost of labour of the engineering personnel of that industry who is in charge of completing the tasks. Typically, companies would often include the ordering costs in the overhead costs. They should allocate the ordering costs based on the number of units they handle in every period.

Holding Costs

Holding costs are the cost you need to acquire, store, as well as dispose of inventory. They consist of the cost of space you need to keep the stock, cost you need to obtain the stock, as well as the cost of obsolescence, which is the cost to dispose of the spoilt or remaining products. Holding prices contributes the most to the inventory costs (Also see How Can Bookkeeping Services Indicate Business Health?).

Administrative Costs

The salaries and wages of the cost accountant, as well as the non-operating workers, contribute to the administrative costs. Cost accountants are people who play a role in compiling the costs of items sold and the costs of inventory, replying to demands for analysis of other inventory, as well as guarding their position to auditors. You will have to include related general workplace costs in the administrative costs too.

Cost of Capital

Cost of capital is the interest that you have to pay to your creditors on the funds you use to purchase the inventory. A lot of firms would use some loans to obtain stock. If a firm has not taken any loan, the cost of money stands for the interest income related to the funds they have allocated to acquire the inventory.

Costs of Space

Costs of space are the expenses associated with the storehouse. It includes the costs of utilities, storage racks, maintenance, inventory managing devices, insurance, storehouse workers, as well as depreciation. All buildings will depreciate eventually, and this is where the depreciation comes from. Insurance plays a vital role in securing the inventory from theft, as well as loss as a result of humanmade and natural disasters. Costs of space may consist of the expenses on safety devices, for example, fire suppression systems and alarm system.

Cost of Obsolescence

The risk of having some inventory damaged while holding them in storage or keeping them unused is always present. It is a must to dispose of these items, typically at a decreased cost or even at no charge. We will call these as obsolescence costs. If there are perishable items among the inventory you purchase, your obsolescence costs could be rather high.

The inventory cost can be significant to your business, as you may have seen in the explanation above. Hence, it is crucial to hire the best accounting services Singapore to keep track of the cost of your business with due diligence. If you fail to do so, you may suffer from losses as the expenses can cause severe loss in profits as well as cash reserves. If you are facing any difficulties in dealing with your inventory cost, do not hesitate to seek help from an expert accounting firm to keep a tight grip of your finances.

As an entrepreneur, most probably you can tell the amount of gross earnings your business generates in a month when someone asks you. However, can you tell that person how much is your net profit? Most likely, you can’t. Financial accounting is not easy to understand. It is challenging, and you have to put in a lot of effort into it. Nevertheless, as an entrepreneur, you need to do so. It is because there are a lot of advantages you can get if you have a clear understanding of even only a few accounting measures which indicates your current and future business health (Also see Advantages You Can Get from a Simple Financial Analysis).

Profit Margin

You can calculate the profit margin by taking your overall net profit after deducting taxes and other expenses, then divide the amount with your sales. It is a helpful method that can aid you in predicting the amount of profit you will generate in the future.

Note that the approximations are not always exact and accurate. However, they are quite near to the real value. The important idea here is that you may utilise this measure to make decisions in advancement, as well as to examine if your company can appropriately sustain its profit margins so that you get to know ways to improve if you need any (Also see Ways to Increase Your Business Revenue).

Gross Margin

The gross margin is defined as the sale price of a specific item subtract the amount it cost you to acquire an opportunity to sell it. For example, your company sells pencils at S$1 per piece. You purchase them from your distributor at half of that price, which is S$ 0.50, and you spent S$ 0.15 on every pencil for its packaging. In overall, you spent S$ 0.65 to sell the item. Thus you have S$ 0.35 as your gross margin.

As a reminder, that S$ 0.35 is not yet your net profit. Other things that you have to take into consideration include the costs your company spends on rental payment, wages, as well as utilities. You will know how many pencils you have to sell to cover those expenses by adding up all the expenditures.

You may start planning about ways you can increase your profit once you have calculated how many pencils you have to sell in a month. You can purchase more to lower your cost, do advertisements, expand your business, and so on.

Later, if you realise that it is impossible to hit the target of your sales you require to cover your costs, you can start considering if you can sell other items to balance the overall costs of your business (Also see How Can Business Owners Manage Their Time Wisely). You may also think about how much you need to raise the price of the things you sell or the ways you may reduce costs on various other expenditures so that you do not have to increase the prices.

Income Statement

An income statement is also called a profit and loss statement. The income statement shows your expenses, costs, as well as profits for a specified period. It is the ideal way to have a clear insight into your net income. The net income is something that investors and business creditors are searching for, as it demonstrates the amount of money your company has earned or loss throughout the fiscal period. Your net income is the determining factor of the amount of taxable income of your company.

Cash Flow Statement

This is almost the same as your income statement, just that it is more comprehensive. The cash flow statements display everything which is going in and out of your business, which includes non-cash deals. This enables you to see more clearly about how your business expenses its funds throughout a certain period.
A cash flow statement is extremely important as it can tell you how and where your company is generating income and what decisions you’ve made about the expenditures.

It is hard to involve yourself deeply in the accounting side of your business. Hence it would be best if you collaborated with companies that offer professional accounting services Singapore. By ensuring that your firm’s books are managed by the experts, you can have peace of mind. This is because not only the finances of your company are safe, but you are collaborating with a team that is willing to lead your way towards being a successful entrepreneur.