Overview of Accounting Financial Statements
Financial statements are like family portraits, they're snapshots of our business or personal finances for a specific period of time, and we only take a limited few, especially from a personal standpoint. In business, the financial statements normally referred to are comprised of an income statement, a statement of owner's equity, a statement of cash flows and a balance sheet. In this article, we're going to look at each and their importance in presenting the financial picture.
Your income statement is the first of the financial documents prepared, and this statement takes business revenue (money in) and expense (money out) and provides a summary of those transactions for a specific period of time. Revenue is generally income from sales. Revenue, however, can also be in the form of rental income, asset sales, or money from investment sales. The expenses, or money spent can cover all sorts of expenditures during the course of operating your business such as labor, utilities, cost of goods, and operating supplies expense. From the income statement we have what is known as "net income" and this carries forward to the statement of owner's equity.
The statement of owner's equity is purely and simply a summary of changes in owner equity that have transpired during a specific period of time. This period of time is generally a month, a quarter, or a year. The statement of owner equity compares the beginning total, any additions of net income, any subtractions or withdrawals of value from the equity balance, and displays a new balance, known as an ending balance. This ending balance is then transferred to the balance sheet. Before we can finish the balance sheet, however, we need a piece of information from the statement of cash flows. So, let's take a look at the statement of cash flows.
The statement of cash flows is a financial statement that provides a summary of all the cash receipts and cash payments for a given or specific period of time. Again, this generally occurs by month, quarter, or year. Cash from operating activities (your actual business sales or services), cash from investing activities (purchases or sales of investment items such as stocks or real estate) and cash from financing activities (cash proceeds from owner investment in business, loan proceeds, or mortgage financing). The statement of cash flows, when complete, provides us with a cash balance or cash on hand balance for the balance sheet.
Now we're ready to discuss the balance sheet. The balance sheet is a compilation of assets, liabilities, and equity. Since the statement of cash flows provides the cash balance, and the statement of owner's equity provides a current equity value, we need those financial statements completed prior to the completion of the balance sheet. On the balance sheet the cash balance, supplies, land, inventory, and accounts receivables are listed under assets. The accounts payable, and notes payable are listed under liabilities. The owner or stockholder equity balance is listed under the owner's equity column, and then the liabilities and owner equity is totaled to compare to the asset column. The figures should agree.
The balance sheet provides the compiled picture of the state of a business, but all the other pieces of the financial statements group are necessary in order to put together the balance sheet.
Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.