• Beth O'Donnell

Overview of Basic Accounting Statements

In my last blog, we looked at the importance of the accounting cycle. We saw how properly recording transactions leads to accurate financial reporting on a regular periodic basis. Today I want to take a look at the three basic financial reports you can use to analyze your profitability and provide results of operations to outside users such as banks and shareholders.

The three basic financial reports which your business will most likely use are the income statement, balance sheet and statement of cash flows. There is a fourth basic financial report, the statement of retained earnings. This report is primarily used in audited financial statements and will not likely be of interest to you at this time.

The income statement is the most important of the basic financial statements. At the end of each accounting cycle, you will want to use your income statement to take a look at your revenues, expenses and profit/loss for that reporting period.

The balance sheet shows your assets, liabilities and owner’s equity as of the ending date of your accounting period. The balance sheet uses the basic accounting equation, Assets = Liabilities + Owner’s equity. Assets are presented first and totaled. Next liabilities and owner’s equity are shown and totaled. The two totals should equal and the difference will be zero. As a business owner, you will want to look at the ratio of your assets to your liabilities. In a later blog we will take a look at analyzing this and other ratios.

The statement of cash flows presents the cash inflows and outflows that occurred during the reporting period. You can use this report to compare sources and uses of cash to profits/losses reported on your income statement. You may be required to present this statement to outside parties along with your income statement and balance sheet.

These basic accounting statements are for profit companies in all sectors. If your company is a not for profit or government agency, different financial reports are used. Contact us at BookSmart Accounting & Finance today. We have experts in all areas of business to assist you with your financial reporting and analysis needs. Why not let us help you understand and make the most of your business financial information.

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