Business Financial Statements 101
Like personal budgets and tax statements, financial statements are vital for any business. They facilitate business decision making, provide a clear picture of the status of the business, and enable owners and managers to know when business goals have been reached. We look at the essential statements for businesses of all sizes, including the profit and loss statement, the balance sheet, the cash flow statement, and the statement of retained earnings.
Why Use Financial Statements?
Financial statements provide readers with a picture of the financial status of the business. In large companies and for investors, financial statement literacy is vital, as it is for small business owners. For those who need specific advice, specialists for small business accounting in Sydney and elsewhere are qualified to provide in-depth consultations about financial reports.
The Essential Financial Statements
1. Profit and Loss Statement
The profit and loss statement (also known as the income statement) provides vital information about the success of the company’s operations. Showing all income and expenses in a specific period, it is an indicator of the profitability and credit status of the business.
- Revenues. All the income that has been generated from either sales or selling capital items. Revenue comes into existent at the point of sale rather than payment.
- Expenses. These are typically the costs incurred by the business carrying on activity in the period. Expenses are to be differentiated from Assets, which are usually a capital good that will bring value.
- Net profit. At a basic level, if your income exceeds expenses in a certain period, your business will have a net profit in that period and is considered profitable.
2. The Balance Sheet
The Balance Sheet gives a snapshot of the financial status of the business at a specific time. There are three elements in the Balance Sheet:
- Assets. Assets are the economic resources in a business, covering items such as stock, inventory, equipment, and cash. An asset can be tangible or intangible, as long as it can be owned or controlled to create positive economic value.
- Liabilities. The liabilities are the debts of any business or the obligations of the business.
- Equity. Equity represents the total value of the business. It’s calculated by subtracting Liabilities from Assets.
3. Cash Flow Statement
Since neither the Balance Sheet nor the Profit and Loss Statement gives an indication of the use of cash and further details about receipts during the period, a Cash Flow Statement plays an important role.
It summarises and specifies the inflows and outflows in any given period. Accountants in Sydney or elsewhere can provide businesses with detailed advice on cash flow and other financial statements.
There are three major components in a cash flow statement.
- Operating activities. Any inflows and outflows associated with production, sales, delivery, or collection of payment from customers.
- Investing activities. Any purchases or sales of Assets (as defined for the Balance Sheet) will come under this component.
- Financing activities. Any inflows from investors and financial institutions, or payments to shareholders and creditors.
4. Statement of Retained Earnings
Retained earnings are a part of net income that is retained by the business rather than distributed to shareholders or owners. When it’s a negative value, retained earnings are known as retained losses (or accumulated deficit or accumulate losses).
A Statement of Retained Earnings will show retained earnings for two points in time: the beginning of the accounting period and the end of the accounting period.
It also shows the retained earnings for that period in detail and provides information on any changes to retained earnings. These can include any dividends that are paid out to shareholders, or when losses or profits change the total of the retained earnings.
Often the Statement of Retained Earnings is included as a section of the Balance Sheet under Equity.