Ask many entrepreneurs and small business owners to show you their financial statements and you'll likely get a glimpse at their bookkeeping software. Although tracking transactions is critical, ledger detail is not a financial statement.
In short, financial statements are detailed and carefully organized reports about the financial activities and overall positions of a business. As any company evolves, it will likely encounter an increasing need to properly generate these reports to build credibility with outside parties, such as investors and lenders, and to make well-informed strategic decisions.
Typical components of financial statements include:
- The income statement. Also known as a P&L (profit and loss) statement, the income statement shows revenues and expenses for a specified period of time, most often monthly or annually. It can be broken out or segmented by division or department to highlight which areas of a business are profitable.
- The balance sheet. This provides a snapshot of a company's assets, liabilities, and equity as of a single point in time, usually the end of a period. Assets are items of value, such as cash, accounts receivable, equipment, and intellectual property. Liabilities are debts, such as accounts payable, payroll, and lines of credit. Equity is another word for the company's net worth, or the difference between assets and liabilities.
- The statement of cash flows. When you want to follow the cash into and out of a company, this is where you look. This statement shows how much cash a company generates over a period, which is a good indicator of how easily it can pay bills.
- The statement of retained earnings. Not always included, this statement shows how much a company's net worth grew during a specified period. In the case of corporations, this statement would include details relating to dividends.
- Notes to financial statements. Many, if not most, financial statements contain supplementary information. These notes may take the form of disclosures that are required under Generally Accepted Accounting Principles, or may be supporting calculations and clarifications.
Financial statements tell the ongoing narrative of your company's finances and profitability. Without them, you really can't tell anyone, including yourself, how well you're doing. Let our assurance team help you tell your financial story!