After just one job, it’s pretty easy to understand the accounts in the ledger. But when we’ve entered dozens, hundreds, or even thousands of transactions—think how many customers come into a restaurant every day—we need reports that show us what’s going on. Looking at the account ledgers would just make our eyes pop out and give us a headache.

First, let’s look at the income and expense statement for our company:

The income and expense statement shows details and totals of income accounts and expense accounts. Note that it does not show individual journal entries. From this report, we don’t know if we did one job or three jobs—just that the total was $1,000 of contracting jobs billed. Revenue or gross income is all the money that has come in, without considering expenses. Net income is gross income less total expenses; that is, it’s the amount of money we’ve made after expenses. Net income is a key factor in business success. When we’re spending more than we’re making, that money is a negative number, called net loss.

The income and expense statement is useful, but it doesn’t show the whole picture. For example, it doesn’t tell us how much money we have in the bank account or even whether or not we’ve paid our subcontractor. To get the rest of the picture, we need a balance sheet.

Now we see that, even though we have $1,000 in the checking account, we owe $200 to someone, so our company is worth only $800. In simple terms, equity is the financial value, or worth, of a company.

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