Financial statements

Financial Statements: The Business Report Card!

Habari mwanafunzi! Welcome to the exciting world of accounting. I know, I know... "accounting" and "exciting" might not seem to go together, but trust me! Think of it like this: if your business was a student in school, its financial statements would be its end-of-term report card. It tells you exactly how well it’s doing – whether it's passing with flying colours (making a profit) or needs a bit of extra tuition (making a loss). Ready to learn how to read this report card? Let's dive in!

Why Every Business Needs a Report Card

Financial statements are official reports that show a business's financial health. They are not just for big companies like Safaricom or Kenya Airways. Even your local duka owner or a matatu operator needs them! But who actually reads them?

• The Owner: To see if their hard work is paying off and to make smart decisions for the future.
• The Bank Manager: Someone at Equity Bank or KCB will want to see these statements before giving the business a loan. They want to know if the business can pay it back!
• The Government (KRA): The Kenya Revenue Authority needs to see how much profit was made to calculate the correct amount of tax to be paid.
• Investors: People who might want to put their money into the business to help it grow. They want to see if it's a good investment.

Image Suggestion: An illustration of a friendly Kenyan business owner sitting at a wooden desk in her shop. She is smiling and looking at a financial report. In thought bubbles above her head, we see the logo for a Kenyan bank (like KCB), the KRA logo, and a symbol for "growth" (like a small plant growing into a big tree).

The Income Statement: Are You Making a Profit or a Loss?

The first major report is the Income Statement (sometimes called the Trading, Profit and Loss Account). Its main job is to show the performance of the business over a period of time, like one month or one year. It's like a movie of your business's financial action!

It answers one simple question: Did we make more money than we spent?

Real-World Scenario: Asha's Samosa Empire

Let's imagine Asha, a smart entrepreneur who runs a popular samosa stall near your school. We'll use her business to understand how this works. For the month of July, let's look at her numbers.

To prepare her Income Statement, Asha needs to know a few key things:

• Sales (Revenue): The total money she got from selling samosas.
• Cost of Goods Sold (COGS): The direct cost of the ingredients for the samosas she sold (flour, meat, oil, etc.).
- Expenses: Other costs of running the stall, like rent for the space, marketing flyers, and her own salary.

First, we calculate the Gross Profit. This is the profit made just from buying and selling.

Formula:
Sales - Cost of Goods Sold = Gross Profit

Then, we calculate the Net Profit. This is the final, real profit after ALL expenses are paid.

Formula:
Gross Profit - Expenses = Net Profit

Let's create Asha's Income Statement for July!

        Asha's Samosa Empire
        Income Statement
        For the month ending 31st July

                                            KSh.
Sales (Revenue from selling samosas)        50,000

Less: Cost of Goods Sold (Ingredients)     (20,000)
                                            --------
Gross Profit                                30,000

Less: Expenses
  Rent for the stall            5,000
  Marketing flyers              1,000
  Asha's Salary                 10,000
Total Expenses                             (16,000)
                                            --------
Net Profit                                  14,000
                                            ========

Wooohoo! Asha made a net profit of KSh. 14,000 in July. Her business is healthy! Kazi nzuri, Asha!

The Statement of Financial Position: What You Own and What You Owe

The second report is the Statement of Financial Position (you might know it by its old name, the Balance Sheet). If the Income Statement is a movie, this is a snapshot. It shows the financial health of the business on a single day (e.g., as at 31st July).

It is built on one of the most important rules in all of accounting, the Accounting Equation.

  What the Business OWNS   =   What the Business OWES to others   +   What the Owner has put in
  
         ASSETS            =             LIABILITIES              +            CAPITAL

Think of it like a weighing scale. It must always, always, ALWAYS balance!

         ASSETS
      ___________
     /           \
    /             \
   /===============\
          / \
         /   \
  LIABILITIES + CAPITAL

• Assets: Resources the business owns that have value. Examples: Cash in a drawer or M-Pesa, the cooking equipment (jiko), furniture (table, chairs), and any unsold samosa ingredients (stock).
• Liabilities: What the business owes to others. Examples: A loan from a SACCO, or money owed to the flour supplier.
• Capital (Owner's Equity): The owner's investment in the business. It’s what is left for the owner after you pay off all the liabilities.

Image Suggestion: A split-screen image. The left side shows Asha's vibrant samosa stall, with labels pointing to her ASSETS: a cash box ('Cash'), a modern jiko ('Equipment'), and boxes of flour ('Stock'). The right side shows the Accounting Equation `Assets = Liabilities + Capital` with icons representing each element, perfectly balanced on a scale.

Let's create the Statement of Financial Position for Asha's business as at 31st July.

        Asha's Samosa Empire
        Statement of Financial Position
        As at 31st July

                                            KSh.
ASSETS
  Cash at bank and in hand                  25,000
  Cooking Equipment                         30,000
  Stock (unsold ingredients)                 5,000
                                            --------
Total Assets                                60,000
                                            ========

LIABILITIES & CAPITAL
Liabilities
  Loan from Women's Enterprise Fund          6,000

Capital
  Opening Capital (what she started with)   40,000
  Add: Net Profit for July                  14,000  <-- HEY! Look familiar?
                                            --------
Closing Capital                             54,000
                                            --------
Total Liabilities + Capital                 60,000
                                            ========

Do you see that? Total Assets (KSh. 60,000) is exactly equal to Total Liabilities + Capital (KSh. 60,000). It balances perfectly!

How the Two Statements Connect

Did you spot the magic link between the two statements? The Net Profit is the bridge!

The Net Profit of KSh. 14,000 that we calculated in the Income Statement is added to the owner's Capital in the Statement of Financial Position. This makes perfect sense: the profit the business made belongs to the owner, so it increases the value of her investment (her Capital).

+----------------------+
|                      |
|   Income Statement   | -----(Calculates)----> Net Profit
|   (The Movie)        |
|                      |
+----------------------+
         |
         |  (This Net Profit is then ADDED to Capital)
         V
+-------------------------------+
|                               |
| Statement of Financial Position |
| (The Snapshot)                |
|                               |
+-------------------------------+

You've Got This!

And that's it! You've just learned the basics of the two most important financial statements. Don't worry if it seems like a lot at first. The key things to remember are:

• The Income Statement shows profitability over time (like a movie).
• The Statement of Financial Position shows the financial position at one point in time (like a photo) and it must always balance (Assets = Liabilities + Capital).

Practice by creating simple statements for a small business idea you have. The more you practice, the easier it becomes. Keep up the great work. Kazi nzuri!