3 financial statements every business owner should get to know

Updated: Jul 31, 2021

There are three main financial statements that help businesses to keep financial information organized. These include—balance sheet, income statement, and statement of cash flow. These financial statements help businesses to establish their true financial position and decision-making.

Income Statement

Also known as a profit and loss statement, an income statement shows the financial performance of an entity for a specific period of time. It comprises the following sections:

  • Sales: the value of what a business sold during a given period

  • Cost of goods sold: the cost used to create a product sold

  • Gross profit: total sales of an entity minus the cost of goods sold

  • Expenses: the cost incurred by a business over a specific period of time

  • Net income: calculated as total revenue from sales minus all expenses

Balance Sheet Also known as a statement of financial position, the balance sheet reveals the financial position of an organization as of the report date. Basically, it shows what an entity owns and how much it owes, as well as its overall worth. A balance sheet is comprised of the following elements—assets, liabilities, and equity. It lists assets on the left side, while liabilities and equity are listed on the right side. A business’s assets have to equal the sum of liabilities and equity.

Statement of Cash Flow

This financial statement reports an organization’s inflows and outflows of cash. A statement of cash flow tells you if a business is generating cash and where the cash went. Using the information in a statement of cash flow, a business can establish if it is generating enough cash to meet both its debt obligations and operating expenses. Generally, cash flow statements are divided into the following sections. (i) cash flow from operating activities, (ii) cash flow from investing activities (iii) cash flow from financing activities. A statement of cash flow may also contain disclosure of non-cash activities if it’s prepared under the generally accepted accounting principles or GAAP.

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