Financial statements are crucial documents that provide insights into the financial performance of a business. The type of financial statement a business uses may differ based on its operations.
- Service Business Financial Statements: A service business provides services to customers, rather than producing and selling tangible goods. The financial statements for a service business include an income statement, a statement of changes in owner’s equity, and a balance sheet. The income statement shows the revenue earned by the business and the expenses incurred to earn that revenue. The statement of changes in owner’s equity shows the changes in the owner’s equity of the business. The balance sheet shows the assets, liabilities, and owner’s equity of the business at a particular point in time.
- Retail Business Financial Statements: A retail business is a business that sells products directly to consumers. The financial statements for a retail business include an income statement, a statement of changes in owner’s equity, and a balance sheet. The income statement shows the revenue earned by the business and the cost of goods sold, also know as cost of merchandise sold. The cost of goods sold includes the cost of the products sold and any direct labor and overhead costs associated with producing those products. The statement of changes in owner’s equity shows the changes in the owner’s equity of the business. The balance sheet shows the assets, liabilities, and owner’s equity of the business at a particular point in time. It includes an asset account for Merchandise Inventory.
- Manufacturing Business Financial Statements: A manufacturing business is a business that produces and sells tangible goods. The financial statements for a manufacturing business include an income statement, a statement of changes in owner’s equity, a balance sheet, and a statement of cost of goods manufactured. The income statement shows the revenue earned by the business and the cost of goods sold. The statement of changes in owner’s equity shows the changes in the owner’s equity of the business. The balance sheet shows the assets, liabilities, and owner’s equity of the business at a particular point in time. The balance sheet includes inventory accounts for raw materials, work in process, and finished goods inventory. The statement of cost of goods manufactured shows the costs incurred to manufacture the products sold during a particular period. This statement includes direct materials, direct labor, and factory overhead costs.
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In conclusion, financial statements are essential tools for understanding a business’s financial performance. The type of financial statement used may differ based on the nature of the business. A service business, a retail business, and a manufacturing business all have financial statements that report relevant information to their specific needs.