A business owner uses accounting statements to converse about its financial statistics with interested parties, including investors and creditors. No matter how big or small your business is, whether you do your bookkeeping, or you have an entire accounting team, three financial statements must be arranged to deliver detailed information about a business’ financial condition. The following three financial statements cover subjects on everything from assets, liabilities, and equity to net income and cash flows.
Balance Sheet
A balance sheet is a financial report that lists the accounts and balances of a business entity’s assets, liabilities, and shareholders’ equity. A business entity reports such financial statistics in its balance sheet at the end of a bookkeeping period, providing a snapshot of its financial situation at that point in time.
Income Statement
An income statement, occasionally mentioned as the statement of profits and losses, reports a business entity’s various profit, costs, and expenses, as well as the net. Therefore, an income declaration is a summary of a business entity’s financial performance during a given bookkeeping period. An income statement typically is systematized to cover functional activities and non-operating events such as investments and any withdrawn processes.
Cash Flow Statement
The statement of cash flows displays the cash inflows and outflows between a business entity and the outside domain during a bookkeeping period. While incomes and expenditures reported in the income statement involve many cash transactions, they also include certain non-cash exchanges. In addition to operating activities, cash flows also come from financing actions and bankrolling activities.
Accounting Statements provide valuable information to a wide range of users:
- Managers require these statements to manage the dealings of the business by evaluating their financial performance and position and making important industry decisions.
- Stakeholders use these statements to weigh the risk and return of their investment in the enterprise and make investment verdicts based on their exploration.
- Prospective investors need these statements to measure the feasibility of investing in a business. Stockholders may foresee future dividends based on the profits disclosed in the reports. Moreover, risks related to the investment may be assessed from the statements. For example, inconsistent profits indicate higher risk. Consequently, financial statements provide a basis for the investment resolutions of potential investors.
- Financial institutions (e.g., banks) use these statements to select whether or not to grant a loan or credit to a business. Financial institutions gauge the financial health of a business to determine the probability of a bad loan. A sufficient asset base and liquidity must sustain any decision to lend.
- Suppliers need these statements to evaluate the creditworthiness of a business and determine whether to supply goods on credit. Dealers need to know if they will be repaid. Terms of credit are set according to the assessment of their customers’ financial health.
- Customers use these statements to measure whether a supplier has the means to ensure the steady supply of goods in the future. This is especially vital when a customer is reliant on a supplier for a specialized module.
- Employees use these statements to judge the company’s profitability and its significance to their future compensation and job security.
- Competitors compare their performance with opposing companies to learn and improve strategies to progress their competitiveness.
- The general public may be interested in the effects of business on the economy, environment, and the local community.
- Governments require these statements to decide the correctness of tax declared in the tax returns. The government also keeps a trail of economic development through analysis of financial statements of companies from different sectors of the economy.
Final Note
Engaging yourself in your business’s bookkeeping can be eye-opening. It’s the best way to see how cash flows in and out of your trade and gain the framework you can use to ask yourself, your employees, and your stakeholders the right questions.
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