Financial Statement Overview
In financial accounting, the 3 most important financial statements relevant to budding entrepreneurs are:
- The Statement of Financial Position or the Balance Sheet
- The Statement of Income or The Profit & Loss Statement
- The Statement Of Cash Flows
Balance Sheet
The Balance Sheet shows a business’s assets, liabilities, and equities. It’s a ‘snapshot’ of the business economic resources at a certain date. That’s why when you see one, it says something like, The Statement Of Financial Position as at dd/mm/yyyy. [Samples]
Profit and Loss Statement
Unlike a Balance Sheet, the Profit and Loss Statement is a summary of the flows of earned revenues and incurred expenses of a business for a period of time. That’s why when you see one, it says something like: Profit & Loss Statement for the year 200X. [Samples]
Statement of Cash Flows
The Statement of Cash Flows summarizes the ‘cash’ effects of the activities of a business for a period of time. These activities can be operating, investing and financing. The keyword to emphasize here is the word ‘cash‘ — it only records activities that involved the transfer of cash. [Samples]
1. Your Balance Sheet shows you what you own and how you acquired them (borrowed from others or contributed by you).
2. Your Profit And Loss shows you how much you are expending each period and how much you are earning.
3. The statement of Cash Flows summarizes the exchange of cash in your operating, investing and financing activities.
When starting a small business, attention should be placed on the Profit and Loss statement because that’s the record of how much income is coming in and how much expenses is going out. Take a look at revenue items to discover which activity is bringing in money, and ask yourself whether current expenses are really necessary. Are there ways in which you could cut your costs? If the answer is yes, get out the scissors!
Current events can be found in our Financial Statements News section.
External Resources:
1. Guide to Understanding and Creating Financial Reports
2. Wringing Vital Signs Out of the Numbers
3. Financial Statement Analysis: A Practitioner’s Guide
