The four most common financial statements businesses use are: Income Statement, Statement of Owner’s Equity, Balance Sheet, and the Statement of Cash Flows. Each statement is very important to businesses in different ways.
The Income Statement in Accounting
The Income Statement, also called the Profit/Loss Statement (P/L) is a report that is typically generated monthly. This statement tells a company how much money was made during a given period of time. It is set up in two sections using the following formula, which has been simplified: Sales – Expenses = Net Profit/Loss.
The Income Statement gives the company a good look at the money that is being earned, and where the money is being spent. It is a good tool used in future planning and budgeting for the company.
Statement of Owner’s Equity in Accounting
The Statement of Owner’s Equity reflects the changes in the owner’s equity of the company for a specified period of time, and is also typically done by the business on a monthly basis. It is calculated using the following formula: Owner’s equity beginning of month + investments + net income – withdrawals = owner’s equity end of month. The importance of the Statement of Owner’s Equity is to show the change in equity. It can explain where money came from and where money went in the business.
Balance Sheet in Accounting
The Balance Sheet is what can be called a “snapshot” of a company. This is because a Balance Sheet refers to a picture of the company for one day only. It does not reflect a period of time. It is normally generated on the last day of each month.
This statement is set up as two sections: The first section is assets, and the second is liabilities and equity added together. It is important that these two numbers must match. This statement is set up using the following formula: Assets – Liabilities = Owner’s Equity.
The Balance Sheet is a valuable tool for companies to see how much the company is worth, and is also an important tool when analyzing debt.
Statement of Cash Flows in Accounting
There are two different methods of calculating the Statement of Cash Flows, the direct method and the indirect method. This statement is typically generated monthly showing cash flow for a given period of time. Neither method has a simple formula used in calculating it.
The Statement of Cash Flows is a good indication to companies as to how well their cash flow in the business is. Knowing the cash flow of a business is good for companies to know how well they are performing. This statement is also a valuable tool used in planning and budgeting.
Understanding Financial Statements used in Accounting
One of the most important foundations in business is understanding the flow of money in and out of the business. Most schools require that students take at least a basic accounting class, and those who continue on in the field will be expected to understand the full concepts of financial statements in businesses. Whether a student or professional, understanding the four basic financial statements in accounting can help guide the individual to keeping proper records for the business.
