Accounting is an important part of any business’ success because it tracks your money flow in a precise and accurate manner.
The backbone of your accounting department is going to be your financial statements. These important pieces of financial information serve a variety of purposes.
Understanding them, and their role in your bookkeeping, can provide you with a better look into why they matter for your business.
The Purpose Of Financial Statements
Think of financial statements as a quick, but accurate, look at your current financial situation. They are designed to highlight, in one quick glance, the inflow and outflow of
money into and out of your business.
However, they also include multiple pieces of information that are used to create a fuller grasp of your finances: balance sheets, income statements, and cash-flow statements. Each of these statements uses your financial information to illustrate your business successes or struggles.
Balance sheets listed out a company’s assets, liabilities, and equity in a simple and easy-to-read manner.
For example, it compares the company’s assets (or items of value) to its liabilities (or what it owes to others) to give a rounded insight into their value. However, the equity is also important. It indicates how much money would be left if the company paid all of its liabilities after selling all of its assets. That value is what the owners or shareholders of the company receive.
Income statements showcase how much money a company made during a year, breaking down the costs and the expenses that were required to make that money. Subtracting these costs from these earnings showcases the net profit or loss for that period.
For shareholders, it also indicates how much earning 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. This section breaks down the inflow and outflow of cash on a more detailed basis.
For example, it will go over 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. It uses the information included in the previous two statements and synthesizes it into a detailed and accurate examination of cash flow.
Three activities sections are used in every cash-flow statement, including operating, investing, and financing. Activities in these sections will vary, based on your company and its operation.
Synthesizing This Information
By bringing together all of this information in one form, a financial statement can catalog a vast array of information about your business. While you can bring them all together into one vast statement, you can also create them separately and use them as needed.
It’s all up to your company and it needs.