Because of the financial information that it provides, accounting is one of the key functions for every business. The reports that are generated through accounting are invaluable as they help management make informed business decisions. The reports are also passed to investors, creditors, regulators, and other stakeholders of a company.
To truly understand accounting, one needs to be familiar with the financial statements that result from the process. There are three main financial statements in accounting that are used by companies to communicate with their stakeholders.
Balance Sheet is a statement that shows a firm’s assets (economic resources), liabilities (credit), and shareholder’s equity (investment in the firm). The balance sheet is a snapshot of a firm’s financial position on a particular date. The total assets of a company must always be equal, or in balance, to the liabilities and shareholder’s equity of the firm.
Income Statement (also commonly referred to as Profit and Loss Statement) measures the results of a firm’s operations over a specified period, usually one year. It reports the failures and successes of a company; its profits and losses. The bottom line of the income statement, net income, shows the profit or loss of that period that is available to the owners. In short, the income statement answers the question of whether or not the business is profitable.
Statement of Cash Flows shows how changes in the balance sheet and income statement reflect the cash position. It tells its viewers whether the business generates enough cash to pay its bills. Cash flows from operations show how much cash is being generated in the normal course of operating a business (sales revenue, labor expenses). Cash flows from investments involve purchasing or selling of fixed assets (equipment) Cash flows from financing result from the borrowing or repaying of debt.
If you need help with your balance sheet, income statements, or statement of your cash flows, we are ready to support and assist you.