Financial statements are the building blocks of accounting. As money enters and leaves your business, you’ll need to record it. There are financial statements available that show some or all of these transactions. They are commonly used by business owners, stakeholders, lenders and other professionals. By understanding the four primary financial statements, you’ll be able to effectively use them in your business’s operations.
#1) Balance Sheet
A balance sheet is a type of financial statement that shows the balances of your business’s financial accounts at a specific point in time. You can use it to evaluate your business’s assets and debt. Assets include money and items of value, whereas debt includes money owed to a lender or supplier. Balance sheets reveal assets and debt, making them a useful tool for business owners and accountants.
#2) Income Statement
An income statement is a type of financial statement that breaks down your business’s net income or net loss at a specific point in time. You can use it to evaluate your business’s revenue and expenses. Your business probably spends money as part of its operations; all businesses, in fact, have expenses. With an income statement, you can calculate your business’s net income or net loss. A new income means your business makes more money than what it spends. A net loss means your business spends more money than what it makes. The former indicates profitability.
#3) Cash Flow Statement
A cash flow statement is a type of financial statement that breaks down the money entering and leaving your business. This is known as cash flow. Using a cash flow statement, you can analyze your business’s operating activities, investing activities and more. Activities that cause money to enter your business or leave your business are typically included in cash flow statements.
#4) Statement of Owner’s Equity
While not as common as balance sheets, income statements and cash flow statements, some businesses use a statement of owner’s equity. This financial statement shows changes made to shareholders’ equity. Shareholders’ equity represents ownership. If your business is incorporated, it will have owners. Both privately traded and publicly traded companies have owners. Owners consist of people and entities that own an equity stake in the business. A statement of owner’s equity is a financial document that reveals changes to your business’s ownership structure as represented by equity.
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