Financial statements are the report card of your business. They tell you how much money you made, how much you owe, and how much your business is worth. The three main financial statements are:
The Balance Sheet
The balance sheet is a snapshot of your business's financial position at a specific point in time. It shows:
- Assets: What you own (cash, inventory, equipment).
- Liabilities: What you owe (loans, accounts payable).
- Equity: The difference between assets and liabilities (the owner's stake in the business).
The fundamental equation is: Assets = Liabilities + Equity.
The Income Statement
The income statement (also called the Profit and Loss Statement or P&L) shows your business's financial performance over a period of time (usually a month, quarter, or year). It shows:
- Revenue: Money coming in from sales.
- Expenses: Money going out for costs (rent, salaries, supplies).
- Net Income: Revenue minus Expenses (your profit or loss).
The Statement of Cash Flows
The statement of cash flows shows how cash moves in and out of your business. It is divided into three sections:
- Operating Activities: Cash generated from day-to-day business operations.
- Investing Activities: Cash used for buying or selling assets (like equipment).
- Financing Activities: Cash from loans or investor contributions.
Other Elements
Your financial statements may also include notes that explain specific items in more detail. Additionally, if you hire a CPA, they may provide different levels of service:
- Audit: The highest level of assurance, where the CPA verifies the numbers.
- Review: A lower level of assurance, involving inquiries and analytical procedures.
- Compilation: No assurance provided; the CPA simply presents the management's numbers in a financial statement format.