What are Financial Statements?

Financial Statements are reports that summarize business transactions. Financial Statements are produced at regular intervals in the business year (monthly, quarterly, annually) to help owners, managers, investors, and other stakeholders track the performance of the business.

Stakeholders use Financial Statements to help them monitor and improve the health of the business over time. Each financial statement shows a different part of the picture of of the business, much like having x-rays from different angles to better understand an injured ankle. Each angle shows different information.

What are the Four Major Financial Statements?

We use four basic Financial Statements to show different parts of the overall picture of the business’s health. Those Financial Statements are Income Statement, Statement of Owner’s Equity, Balance Sheet, and Statement of Cash Flows.

  1. Income Statement (also called Profit and Loss Statement or P&L) shows whether the business is making a profit. The formula for the Income Statement is Revenue – Expenses = Profit or Loss. As we said before, Profits increase Equity and Losses decrease Equity.
  2. Statement of Owner’s Equity (also called Statement of Shareholders’ or Stockholders’ Equity or Statement of Partners’ Equity or Statement of Members Equity) shows where the Owner’s Equity was at the beginning of the month or year and what changes happened to it during that period. Did the owner put money in or take money out, did the business have a profit or loss?
  3. Balance Sheet shows the breakdown of Assets, Liabilities, and Equity. It lists all of the Asset accounts (Cash, Accounts Receivable, Inventory, Vehicles, etc.). It lists all of the Liability accounts (Accounts Payable, Salaries Payable, Mortgage Payable, etc.). And it shows the summary of the Owner’s Equity.
  4. Statement of Cash Flows shows where the cash came from and where it went. How much cash came into the business? Was it cash from operating the business (for example, customers paying us) or did it come from investing (selling an asset) or financing activities (taking out a business loan). How much cash went out of the business? Was it cash we used to pay our employees and our suppliers? Or, was the cash used to make a loan payment or to purchase an asset? And most importantly, do we have more or less cash than we started with?

You can learn more about Financial Statements by watching this video:

Video explaining how financial statements are used to track performance.

Caroline Grimm

Caroline Grimm is an accounting educator and a small business enthusiast. She holds Masters and Bachelor degrees in Business Administration. She is the author of 13 books and the creator of Accounting How To YouTube channel and blog. For more information visit: https://accountinghowto.com/about/

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