Operations: Functional Accounting, Part 2

accounting statements

In the first article on Functional Accounting in May, we covered the accounting process and the terms and definitions used in accounting, which everyone should know and understand. Now, we will take a look at the basic Accounting Statements, what each one contains, and how to get the information out of them that you need to run your business.

The financial accounting statements you need to be most familiar with are the Balance Sheet and the Income Statement. There are many other statements such as the Cash Flow Statement, Statement of Retained Earnings, etc., but we are just covering the basics here. Keep the following accounting process in mind while we are covering this, which normally works from left to right:

the accounting process

The Balance Sheet

The Balance Sheet contains all entries from every financial transaction in the company into all accounts including the assets and the liabilities.

The Balance Sheet shows the balance of each GL account (may be summarized such as “Cash $___” instead of listing all cash accounts) as of a specific date. It is broken out into three sections: Assets, Liabilities and Owner’s Equity sections.

Under Assets, you will have:

  • Current Assets: assets you have or will receive within a year, such as cash, accounts receivable, inventories, prepaid accounts, etc.
  • Long-term Assets: assets which are not as liquid and will be received after a year or which have a useful life of over a year, such as equipment and building, which you may be depreciating over many years.
  • Start-Up Costs: These may be amortized over many years, deposits, etc.

Liabilities are listed as Current Liabilities, such as:

  • Accounts payable.
  • Unearned (also known as deferred) revenues: such as personal training packages and/or Pilates sessions.
  • Accrued Payroll or Long Term Liabilities: such as Notes Payable, Due to Accounts, etc.

Finally there is Owner’s Equity, which will contain:

  • Current Net Income to date.
  • Retained Earnings (Net Income from previous years).

Total Assets will always equal Liabilities plus Owner’s Equity (A=L+OE). It must balance. Remember, this shows the value of all the accounts as of a particular date, which is usually at the end of the month. These values will be checked against other sources to verify the numbers such as Bank Accounts, Accounts Receivable Aging Report, Accounts Payable Aging Report, etc. As a manager, you can dig down to these reports to verify these numbers, along with the details that make them up.

The Income Statement

The Income Statement is what most managers will look at on a regular basis. It comes in many forms and you can choose which type of statement gives you the best comparisons.

For example, statements come in a Detailed or Consolidated format, Departmental or All, Compared to Last Year or Budget, etc., and is for a period of time (normally a calendar month).

All income is listed first and totaled in the first row of numbers. Then direct expenses related to retail-like revenues (such as Food Cost and Cost of Goods Sold (COGS)) are next. These expenses are subtracted from the Income and the Net Total, which is called Gross Margin or Gross Profit. Then all other expenses are listed, totaled, and then subtracted from Gross Margin for your Net Income.

The next row contains information which is dependent on the type of Income Statement you chose — Budget Comparison (shown below) or Last Year Comparison. The next row will usually be Actual Numbers Year To Date, and then the final row will normally be Year To Date numbers for the Type you chose — Budget or Last Year.

Remember, if you need information on a number, dig deeper. In the graph above we show Training Revenues on the Income Statement, and then the box shows the detail that makes up that number. This info in the Box is from the GL (General Ledger) report and shows how that number was calculated and where those numbers came from.

In this example, it will show Revenues posted from the club management software and some other entries. Those numbers added up with some adjustments equals the number shown on the Income Statement. Some adjustments done to the numbers may be to adjust the numbers to the correct Accrual number. Adjustments are done by the Accounting Department, normally in the form of Journal Entries.

As shown above on the GL, it shows you sold $77,852 in training this month (multiple entries on GL), but only $73,400 was earned (sessions delivered with adjustments). Remember, under the Accrual Method, you only show earned income ($73,400) on the Income Statement. The other $4,452 of it was adjusted from this total for a correction needed on a return to a member, along with income not earned and is still owed to your members of $4,300.

This $4,300 is a liability and belongs on the Balance Sheet. So, to adjust to Accrual, that $4,300 in training which was sold but not delivered is moved from Income on the Income Statement to Unearned Revenues on the Balance Sheet. This shows you owe that $4,300 to your members and then when you deliver it, it will be moved back to the Income Statement as earned income. Until then, it is carried on the Balance Sheet. If you still need more detail on those numbers from the club management software, dig deeper and get details from that software.

The key here is to remember that all the numbers on the accounting statements have more detail behind them. Don’t stop until the numbers make sense. Your Accounting Department is here to deliver accurate numbers according to GAAP and to work with the managers to help it all make sense. If they will not give details or just can’t explain where a number came from, you may need to find new accountants. Real accountants give answers, not the runaround.

I hope I did not lose you in this, but if you need more explanation or have further questions, please do not hesitate to call or email me. Next time we will discuss key ratios, formulas, and accounting terms used regularly in our industry.


Larry Conner is the President/GM of Stone Creek Club & Spa. For more information he can be reached at larryc@stonecreekclubandspa.com.

1 Comment

  1. John richards

    July 17, 2017 at 8:31 am

    Great refresher Larry!

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