The Four Basic Financial Statements
Written by Eddy Hood
If you own a small business, you understand the importance of keeping your financial information organized. You probably also know that bookkeeping can be a headache. If you are trying to make your accounting as easy and seamless as possible, it's helpful to understand the four basic financial statements. You can even download templates of these statements.
One of the four major financial statements is the income statement, which shows net income or net loss. This type of statement tracks all the money coming in and all the money going out. Money paid out is called expenses and coming in is called revenue. When the expenses exceed the revenue, the income statement will show a net loss. The income statement is broken down into categories, including:
- Operating expenses
- Non-operating expenses
Operating expenses include things like advertising and rent for office space. Non-operating expenses can include a one-time purchase and interest on borrowed money. Sales encompass the cost of all goods sold.
The balance sheet is another one of the four basic financial statements and it contains assets, liabilities, and owners' or shareholders' equity. The assets include cash, property, inventory, and anything else owned by the company. Assets are listed on the left side of the balance sheet. Liabilities and equity are listed on the right side. Liabilities include accounts payable or any type of payment made on a long-term loan.
The owners' or shareholders' equity is established when the amount of liabilities is subtracted from the amount of assets. The reason it's called a balance sheet is because the formula should always look like this:
- Assets = Liabilities + Shareholders' Equity
Statement of Cash Flow
The third of the four major financial statements is the statement of cash flow. The number of categories on this statement will be different depending on the size of the company. For larger companies, the categories include:
- Operating activities
- Investing activities
- Financing activities
- Supplemental information
For smaller companies there are only two categories: cash inflows and cash outflows. The basic principal of the statement of cash flow is to know and understand exactly where cash is flowing in from and where it is flowing out to. It enables the company to see if they are spending more than they are earning or vice versa. If the amount of cash is consistently more than the net income, it means the company's net earnings are "high-quality."
Statement of Owner's Equity
If there are any changes in the owner's equity between accounting periods, it is listed on the statement of owners' equity, another of the four main financial statements. The key components listed on this statement include:
- Beginning equity balance
- Additions and subtractions
- Ending balance
The additions and subtractions are for a particular period and can include things like net income, dividend payments, and withdrawals.
Help for Your Small Business
By preparing these four main financial statements, you will be able to see how well your company's finances are doing or find areas that need improvement. If you do not have the required time or understanding of financial statements, there are online services that can help. If you're looking for an outsourced firm, be sure to check out our financial team.