The financial statements of an organization give a clear picture of the organization's financial health. The statements also provide information needed to make decisions about the present and future direction of the organization.
Accountability is maintained when supporting documentation justifies every transaction that takes place in the organization. After preparation of financial statements, an audit or a review by a third party is normally provided by an accounting firm. Audited statements contain an auditor's opinion that they believe that the statements are a fair representation of the financial position of the organization at year-end.
The requirements for audit or review of Financial Statements will vary depending on the structure of the organization and the revenue of the organization. For more information see Non-profit Financial Statements.
The Income Statement (also known as the statement of operations, revenue and expenditure statement or the profit and loss statement) for the fiscal period shows what an organization received as income (revenue) and what was spent over a period of time (expenditures). Revenue information comes from the cash receipts journal and the expenses come from the cash disbursements journal. The difference between what was received as revenue and what was spent is either a surplus or a deficit. A surplus means that more revenue was generated than expenditures and a deficit means there were more expenses than revenue. The surplus or deficit is reported on the bottom line.
Income Statements are prepared on a monthly or quarterly basis and compared to the budget and forecast on the statements. The forecast is the amount of income and expenses projected for the year based on what has come in and been spent already and what you expect to receive and spend for the rest of the year. The picture below illustrates an Income Statement for ABC. The favourable or unfavourable variance column represents the difference between the total year budget and forecast figures. Once the variances have been pinpointed the reasons for them are explored and action is taken if required.
The balance sheet or statement of financial position is a snapshot of the organization's assets and liabilities at a particular point in time. For this statement, total assets will always equal the total of liabilities and equity (Assets = Liabilities and Equity). Assets are what the organization owns or what is owed to them. Liabilities are what an organization owes. Equity is what is left of the assets once all the liabilities have been paid and is known as net assets in a not-for-profit organization.