Accounting plays an important part in the success of any business because it tracks money flow in a precise and accurate manner. Financial statements are the backbone of any accounting department. These important pieces of financial information serve a variety of purposes. Understanding the role of financial statements in bookkeeping can provide better insight into why they matter.
The Purpose Of Financial Statements
Think of financial statements as a quick but accurate look at your current financial situation. These statements are designed to highlight the inflow and outflow of money into and out of your business at a quick glance. In addition, such statements include multiple pieces of information used to create a greater grasp of your finances: balance sheets, income statements and cash-flow statements. Each of these uses your financial information to illustrate your business successes or struggles.
Balance sheets list a company’s assets, liabilities and equity in a simple and easy-to-read manner.
For example, a balance sheet compares the company’s assets (items of value) to its liabilities (what it owes to others) to provide a rounded insight into their worth. Also important is equity, which indicates how much money would be left if the company paid all of its liabilities after selling all of its assets. The remaining value is what the owners or shareholders of the company receive.
Income statements showcase how much money a company made during the year, breaking down the costs and expenses that were required to earn that money. Subtracting costs from earnings illustrate the net profit or loss for that period.
For shareholders, income statements also indicate how much earnings are made per share. In a sense, they provide a closer look at how much money a firm is making and losing every year. Note that some income statements may report on shorter periods, such as four or six months.
Cash Flow Statements
Last, but not least, is the cash flow statement, which breaks down the inflow and outflow of cash on a more detailed basis.
For example, a cash flow statement will review every transaction that occurred during a period (typically a month or a quarter) and highlight how much money was made, how much was lost, and whether or not the company profited. Using the information included in the previous two statements, the cash flow statement consolidates the data into a detailed and accurate examination of how the money is moving.
Three activities sections are used in every cash-flow statement, including operating, investing, and financing. Activities in these sections will vary, based on the company and its operation.
Synthesizing This Information
By unifying all of this information in a single form, a financial statement can catalog a vast array of information about your business. While each set of information can be merged together into one large financial statement, each can also be utilized individually and used as needed.