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What Are Financial Statements?
Depending on the type of your business, you could have a small amount of financial statements in the accounting process or a plethora of them. Financial statements are utilized to determine the value of a business, any gains or losses, income and expenses, and other things like debt-to-earnings ratios, and capital gains and losses.
Every financial statement you use in your accounting process should be reviewed monthly, quarterly, or annually to ensure you stay abreast of how well your company is doing or if it’s losing money.
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Various Types of Financial Statements
There are many types of financial statements. Some are used by investors or lenders to determine the worth or value of a business and some are geared more toward the CPA or tax professional. All types of financial statements in accounting should be assessed by the business owner prior to release to any third party.
Let’s take a look at the most commons types of these financial reports:
Balance Sheet – The balance sheet shows a company’s assets, liabilities, owner’s equity and net worth at any given time. While a balance sheet can be a great tool for the business owner, to an investor, it may hide detail in summary accounts and not reveal the true position of a business.
Income Statement – Also known as a profit and loss statement, the income statement shows a list of all revenues (per department as well) and then lists both fixed and variable expenses to show the company’s profit (or loss). The income statement is also a great tool to determine capital gains or losses and debt-to-earnings ratios.
Expense Statements – This type of financial report accurately lists all the expenses in a certain period of time, usually monthly or annually and the expense statement can be broken up by type of expense for easier review.
Specific Journals – If your accounting system offers specific journals for detail tracking like accounts receivables or payables, these can help you quickly determine what money is owed and the customers that owe you money. Each journal is scheduled by customer or vendor number and can be printed individually. For example, you may schedule your inventory in a journal and be able to quickly see how much is on hand as well as aging inventory. Journals are important financial statements in accounting as almost any type of account can be schedules—even owner or investor accounts. Journals will show the detail an income statement or balance sheet may not reveal.
Cash Flow Analysis – These are often called cash flow proformas and generally come in two types. The first may be your initial cash flow forecast which shows expected revenue and expenses to determine a net profit. The second may be an actual cash flow forecast that enables you to compared predicted numbers to actual numbers.
Trial Balance – This report shows every single debit or credit made throughout your accounting cycle via the general ledger and should be reviewed monthly to ensure its accuracy. A trial balance must balance (all the debits and credits) in order for it to be accurate. Otherwise, you may need to prepare an adjusted trial balance.
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Why You Need Financial Statements
As a business owner for many years, I’ve come to rely on each individual financial statement in a different way. I may take a quick look at the balance sheet but then explore my journals to see what those summary account numbers entail.
Income and expense statements can show me where my income is mostly coming from and where I’m spending my money most.
A cash flow forecast I prepare in the beginning of the year can be compared to actuals, even on a monthly basis to determine if I’m making or losing money.
Even a glance at the trial balance can help me determine starting and ending balances for any account, and in most trial balance offerings, I have the option to “drill down" or take a further look at what’s in each account.
Every financial statement in accounting has its purpose--and to think you can keep all those numbers “in your head" is not really your best bet to running a successful enterprise.