Different Types of Financial Statements Essential to Businesses
Financial statements are essential tools for every business, as they provide a comprehensive and detailed overview of an organization’s financial health and performance.
On that note, read on to know the four primary financial statements that every business should prepare and maintain: the balance sheet, the income statement, the cash flow statement, and the statement of owner’s equity. Gaining a thorough understanding of these financial statements will help you better manage your business and achieve your financial goals.
1. Balance Sheet
The balance sheet provides a comprehensive overview of a company’s financial health. It shows the company’s assets, liabilities, and owner’s equity, which are used to calculate the overall net worth of the business.
The balance sheet is divided into two main sections:
a. Assets: These are resources that a company owns and can use to generate revenue. Assets are classified into current assets, which can be converted to cash or used within one year, and non-current assets, which have a longer lifespan.
Some examples include cash, inventory, and accounts receivable, while non-current assets include property, plant, and equipment (PP&E), intangible assets such as patents and copyrights, and long-term investments.
b. Liabilities and Owner’s Equity: This section of the balance sheet shows the company’s obligations and the owner’s investment in the business. Liabilities are classified into current liabilities, which are due within one year, and non-current liabilities, which have a longer repayment period.
These come in the form of accounts payable, short-term loans, and income tax payable, while non-current liabilities include long-term loans and mortgages. Owner’s equity, also known as shareholder’s equity or net assets, constitutes the residual interest in the company’s assets after all liabilities have been deducted.
2. Income Statement
The income statement summarises a company’s revenues, expenses, and net income, typically within a quarter or a year. The income statement is divided into three main sections:
- Revenues: This section lists all the sources of income generated by the company during the reporting period, including sales revenue, interest income, and other operating and non-operating income.
- Expenses: This section shows all the costs incurred by the company to generate revenues, such as the cost of goods sold (COGS), salaries and wages, rent, utilities, and depreciation.
- Net Income: This is the final figure on the income statement and represents the company’s profit or loss for the reporting period. You can calculate this by subtracting total expenses from total revenues.
3. Cash Flow Statement
The cash flow statement is a detailed account of a company’s cash inflows and outflows. It helps business owners and stakeholders understand how the company generates and uses cash and is critical for evaluating the liquidity and solvency of a business. Here’s what you need to know:
- Operating Activities: This section shows the cash generated or used, such as cash received, cash paid to suppliers, and cash paid for salaries and other operating expenses.
- Investing Activities: This section records the cash flows from acquisition or disposal of long-term assets, such as property, plant, equipment, and investments.
- Financing Activities: This section shows the cash flows related to the company’s financing activities, such as issuing new shares, borrowing or repaying loans, and making dividend payments to shareholders.
4. Statement of Owner’s Equity
The statement of owner’s equity, also known as the statement of changes in equity, provides a summary of the changes in a company’s owner’s equity over a specific period. It shows the opening balance of owner’s equity, any additional investments or capital contributions made by the owners, the net income or loss for the period, dividends paid to shareholders, and the closing balance of owner’s equity.
This statement is essential for understanding how a company’s financial performance and decisions, such as dividend payments or additional investments, impact the owner’s equity.
The Bottom Line
Understanding the different types of financial statements is crucial for anyone involved in business, from owners and managers to investors and creditors. These statements provide valuable insight into a company’s financial health, performance, and potential for growth.
By regularly reviewing and analyzing these statements, businesses can make informed decisions, improve efficiency, and ultimately achieve long-term success.
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