Meanings of Income Statement Part III

Meanings of Income Statement Part III

The difference between the balance sheet and the income statement

The annual financial statements include your company’s balance sheet and income statement. Both are important to check the financial health of your company. The differences are as follows:

  • The balance sheet represents the current financial position of your company. It includes all assets on the one hand and liabilities on the other. The most liquid assets, your fixed assets, are listed first. This is followed by the inventories, the receivables and the bank balances. On the other hand, your capital comes first, followed by provisions and liabilities.
  • The income statement (income statement) , also known as the statement of comprehensive income, reflects the overall performance of your company. It shows you whether you made a profit or a loss. The main components are the expenses and the income.

In summary one can say

  • The income statement and the balance sheet are part of the annual financial statements.
  • The income statement reflects the development of the current year in your company. The balance sheet gives you information about assets, receivables and debts from the beginning of the fiscal year to the end of the fiscal year.
  • The income statement shows you current profits and losses, while the balance sheet shows the financial health of your company.

The multi-level income statement

The multi-level income statement includes the one-, two- and three-level income statement . To make it a little clearer, please have a look at the following structure:

Step expenditure in Euro Yield in Euro
1 expenditure 300 € proceeds 500 €
1 Profit € 200
1 500 € 500 €
2 general effort 30 € Profit € 200
2 Operating profit 175 € Interest income 5 €
2 205 € 205 €
3 extra effort 10 € Operating profit 175 €
3 Corporate profit € 167 extra income € 2
3 € 177 € 177

According to besteducationschools.com, profit is the most important factor. It shows whether you can cover your expenses with income. This is the so-called contribution margin. The costs for wages, depreciation, office supplies, etc. are then deducted from this profit. This is how you get the operating profit. The operating profit shows you how much profit you have made with your core business. The company profit shows you how high the overall success of your company is, including any ancillary business, such as the rental of real estate or investment business.

Management income statement

In a company, profit center accounting or profitability accounting, also known as the management income statement (MER), is generally used.

The three system parts of the MER

  • The first part of the MER is the sales income statement . This part includes the step-by-step contribution calculation. This also includes the actual invoice and the budget.
  • The second part is the variance analysis . With it, all deviations, for example from the budget, are shown. The MER can be used for actual accounting as well as for budget accounting. When planning, the deviations and the management result would then be zero.
  • The third part is the voting bridge . It is the connection between your internal accounting and the financial accounting as well as the balance sheet accounting.

Imputed depreciation is recorded in the management accounting , taking the business objectives into account. In the balance sheet, on the other hand, the depreciation planning is based on tax considerations. So linear, degressive or special depreciation.

Balance sheet and income statement summary

You probably think now that with so much theoretical basic knowledge I get straight gray hair. The thought is not so absurd at all. But there is software like that from sevdesk that will help you avoid gray hair. Every company must prepare a balance sheet including the income statement in accordance with the German Commercial Code. However, the income statement differs from company to company. For small companies and start-ups, a cost center and cost unit accounting is usually sufficient in addition to the monthly, quarterly and annual financial statements. For some companies, only cost center accounting is sufficient. The income statement can be combined with a target / actual comparison or budget planning. Liquidity planning can also be included. Every company has to determine for itself which instruments it really needs to control the company’s success.

If all of this seems too difficult for you, use the appropriate software and get support from a tax advisor. But one thing is very important to know. 50% of the company’s success depends on a good MER. Therefore, you should also devote the necessary time to her. And if all else fails, start small with the P&L and slowly add other instruments. Your company should be worth it to you!

Income Statement 3