The Three Main Financial Statements Are:
- Balance Sheet (other names include Statement of Financial Position and Net Worth Statement)
- Income Statement (other names include Profit & Loss Statement, Statement of Operations)
- Cash Flow Statement (other names include Statement of Changes in Financial Position)
I have other blog posts that go deeper into each statement. This blog post is an introduction to what each statement is and why it is important to look at these statements on a regular basis.
- The Balance Sheet tells what a company “owns” and what it “owes”. The Balance Sheet reflects the net worth of a company for a specific point of time. The three main parts of the Balance Sheet are, Assets, Liabilities and Shareholder’s Equity.
Assets are what a company owns: Cash, Buildings, Equipment and Inventory.
Liabilities are what a company owes (debts): Loans, Suppliers, Employees
Shareholders Equity is the net value of the owners claim (Assets less Liabilities).
A Balance Sheet “balances” because the following formula is always true: Assets = Liabilities + Shareholder’s Equity or Asset – Liabilities = Equity
The Balance Sheet is important because as a business owner you want to make sure that you are not over extended in loans versus what you have in assets. To learn more about the Balance Sheet see this blog post.
- The Income Statement reflects the company’s operations over a period of time. It has a specific beginning and end date, for example, a month, quarter or year. The purpose of the Income Statement is to reveal if a company is profitable. It provides three crucial figures for investors:
- Revenue: Total Sales
- Expenditures: Total Costs and Expenses
- Income: How much profit was generated
A company’s revenue, or sales, is all the money it makes by selling products and/or services to customers. The company’s expenditures, such as employee payroll, supplier costs, rent and other costs associated with running a business.
The result of subtracting expenses from revenues is a company’s net profit (if revenue is higher than expenses) or net loss (if expenses are higher than revenues).
To learn more about the Income Statement read this blog.
Both the Income Statement and Balance Sheet use accrual method accounting, which records revenue and expenses as they occur, now when payment is received or made.
- The Cash Flow Statement tells investors what happened over a period of time, such as a month, quarter or year. It’s sole purpose is to track the movement of cash (what cash came in and what went out).
The cash flow statement is divided into three key sections: operating activities, investing activities and financing activities.
Operating activities are cash entering and exiting the company’s bank accounts through normal business operations. In other words what comes in from sales (income) and what went out to pay bills (expenses).
Investing activities represent the cash used to invest in and maintain the company, including capital expenditures and acquisitions.
Financing activities are how a company’s cash flow changed based on its activities with banks and investors. This includes borrowing money (loans), paying off loans and paying dividends.
The Cash Flow Statement uses cash basis accounting, not accrual accounting. Cash accounting records sales when the money is received and expenses are recorded as paid.
To learn more about the Cash Flow Statement read this blog.
Together these three statements will give a business owner, investor or lender an overview of the health of an organization. As a business owner it is important to understand what is in these statements so you can use them as a tool to make financial decisions.
To discover how Lila MacDowell Bookkeeping can help your business:
Contact Us
