These are written documents describing a company’s business and financial performance.
Financial statements are regularly audited to ensure consistency and accounting, funding or spending by government departments, accountants, corporations, and so on.
In short, it explains practically how the company performs.
The financial statements include three primary types: the balance sheet, income statement, and the cash flow statement.
These three thing tells you, where the money really is and how money flows in your company.
Let’s assume you ‘re an independent yoga instructor who teaches yoga to people. Financial statements will show you how much you are earning in a month, how much cash you spend on supplies, and your business ‘ overall worth.
There are three types of financial statements
- Balance sheet
- Income statements
- Cash flow statement
These are made by the firm’s own accountants or from any independent accounting firm.
The balance sheet consists of three things i.e assets, liabilities, and equity.
Assets are of two types i.e tangible and intangible. Tangible assets include land, building, plant, etc. and intangible assets include goodwill, patents, etc. Assets are recorded on the right side of the balance sheet
Liabilities are what an individual or a firm owns. It can be long term and short term. It is recorded on the left side of the balance sheet
Equity is the common stock, preferred stock, etc also shown on the left side of the balance sheet.
Just as we’ve said, the balance sheet is only a list of balances. Nearly every day balances will change. A balance sheet is then published only at the end of a specified date. It is presented on the last date of the financial year. This is every year on 31 March in India.
For the sake of a clear contrast, businesses present this year’s balance sheets and this year’s balances.
For example, at the end of 2019 the equity balance is 8000 lakh and at the end of 2018 is 700 lakh, there can clearly be seen a difference in the equity balance of 100 lakh.
The income statement is also known as profit and loss or P&L account. The objective of the profit and loss account is to present an overview of the income, expenses, gains, losses, and resulting net income which took place over a year, quarter, or another period of time of a company.
Net sales, operating costs, depreciation and amortization, interest rates, royalties, preferred dividends, and net profit are the critical elements of a P&L account.
Income statements typically contain a heading with a business name, statement title, and time span. The P&L statement can be high or small, based on the size and nature of the product.
A simplified income statement will have three main categories: revenue, expenses, and net income or loss.
Cash flow statements
A cash flow statement shows you how often the money enters the company and leaves.
It is one of the three most significant financial statements for handling your small business accounts, along with balance sheets and Profit and loss accounts, and ensuring you have enough cash to keep up with operations.
Cash flow is made on a regular basis that tells you how much money you have on hand for a given period of time.
While profit and loss are pretty good to demonstrate to you how much cash you’ve spent and earned, P&L doesn’t exactly tell you how often funds you’ve got on hand for a given time period.
Therefore, even though you see the income listed on the P&L account, you might not have had the cash on hand from that income.
The cash flow statement changes the details reported on your income statement, and you see the net cash flow as well as the amount of money that you have on hand during that time span.