If you're a small business owner, you may be thinking that your accountant is the only person who could possibly be interested in your business's financial statements.
But if you're looking for investors for your business, or want to apply for credit, you'll find that four types of financial statements—the balance sheet, the income statement, the cash flow statement, and the statement of owner's equity—can be crucial in helping you meet your financing goals.
Understanding financial statements
It's important for the small business owner to understand these four types of financial statements and the information they provide for the investor or creditor interested in providing funds for your business.
Both individually and taken together, these financial statements give a potential investor or creditor a wealth of information and can have a serious impact on your business's ability to obtain the funds or financing it needs.
1. Balance sheet
Also known as a statement of financial position, or a statement of net worth, the balance sheet is one of the four important financial statements every business needs.
Based on the basic accounting equation, or balance sheet equation [Assets = Liabilities + Equity], the balance sheet provides a snapshot of a business's assets, liabilities, and equity.
It also provides users with a look at the business's financial position at a specific point in time, and financial statement analysts use the information it contains to calculate several important financial ratios.
2. Income statement
The income statement is another important financial statement for your small business. It provides users with a picture of the business's financial performance over a specific period of time.
Also known as a statement of revenue and expense, or a profit and loss statement (P&L), the income statement is a statement of earnings that shows a business's operating and nonoperating revenue and expenses.
Like the balance sheet, the information contained in an income statement is used in financial statement analysis to calculate financial ratios that provide users with further insight into a business's financial performance.
3. Cash flow statement
The cash flow statement, also known as a statement of cash flows, or a statement of changes in financial position, is an important financial statement that gives users an understanding of how well a business is managing its cash flow.
Using the information in a cash flow statement, users are able to see whether a business is generating sufficient cash to meet both its debt obligations and its operating expenses.
The typical cash flow statement format provides information about a business's cash from operating activities, cash from investing activities, and cash from financing activities.
4. Statement of owner's equity
The fourth financial statement that a business needs is a statement of owner's equity, also known as a statement of changes in equity, or a statement of shareholders' equity.
It shows the business's retained earnings—the profit kept, or retained, within a business rather than distributed to owners or shareholders—both at the beginning and at the end of a specific reporting period.
Retained earnings are often used to either reinvest in the company, or to pay off the business's debt obligations. It provides users with information regarding the financial health of a business, as it shows whether the business is capable of meeting ongoing financial and operating obligations without requiring its owners to contribute more capital.
By preparing each of these financial statements, not only will you be able to provide a prospective investor or creditor with important information that they need to assess your business, but also you will be able to identify trends in your business's performance that will help you to position your business for continued success.
You can work with your accounting professionals or engage an online service provider to help ensure that your business is compliant with its reporting and obligations throughout the year.
Find out more about Business Accounting
FAQs
There are four primary types of financial statements:
- Balance sheets.
- Income statements.
- Cash flow statements.
- Statements of shareholders' equity.
For-profit businesses use four primary types of financial statement: the balance sheet, the income statement, the statement of cash flow, and the statement of retained earnings. Read on to explore each one and the information it conveys.
What are the 4 components of the financial statements? ›
The components of Financial Statements are the building blocks that together form the Financial Statements and help understand the business's financial health. And consists of an Income Statement, Balance Sheet, Cash Flow Statement, and Shareholders' Equity Statement.
What are the four 4 most important financial statements that a company must produce what information is contained in each one? ›
They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholders' equity. Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time.
What are the 4 basic financial statements in order of preparation? ›
The four financial statements (in order of preparation) are the income statement, statement of retained earnings (or statement of shareholders' equity), balance sheet, and statement of cash flows.
Are there 3 or 4 financial statements? ›
For-profit primary financial statements include the balance sheet, income statement, statement of cash flow, and statement of changes in equity.
What are the 3 main financial statements that companies should have? ›
The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.
What are 5 elements of financial statements? ›
The major elements of the financial statements (i.e., assets, liabilities, fund balance/net assets, revenues, expenditures, and expenses) are discussed below, including the proper accounting treatments and disclosure requirements.
What are the four types of ratio analysis? ›
In general, there are four categories of ratio analysis: profitability, liquidity, solvency, and valuation. Common ratios include the price-to-earnings (P/E) ratio, net profit margin, and debt-to-equity (D/E).
What are the 4 primary components of a financial system? ›
The main financial system components include financial institutions, financial services, financial markets, and financial instruments.
Typically, you'll need all four: the income statement, the balance sheet, the statement of cash flow, and the statement of owner equity. By preparing these four accounting financial statements, you will be able to see how well your company's finances are doing or find areas that need improvement.
What were the 4 components of financial planning? ›
The main elements of a financial plan include a retirement strategy, a risk management plan, a long-term investment plan, a tax reduction strategy, and an estate plan.
What are all 4 financial statements? ›
The 4 types of financial statements
- Balance sheets.
- Income statements.
- Cash flow statements.
- Statements of shareholders' equity.
But if you're looking for investors for your business, or want to apply for credit, you'll find that four types of financial statements—the balance sheet, the income statement, the cash flow statement, and the statement of owner's equity—can be crucial in helping you meet your financing goals.
What are the 4 financial statements of GAAP? ›
The Four Financial Statements Required for GAAP Compliance
There are four different financial statements that GAAP requires companies to report: income statement (or P&L statement), balance sheet, cash flow statement/statement of cash flows, and the statement of owner's equity.
Which of the 4 financial statements do you think is the most important and useful in predicting a company's success? ›
The balance sheet is particularly important as it provides a snapshot of a company's financial position at a specific moment in time, empowering a business owner or manager to establish the company's most important ratios such as solvency versus liquidity that are particularly important for debt management.
What are the 3 important financial statements in accounting? ›
The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.
What are the four types of financial transactions? ›
There are four main types of financial transactions that occur in a business. These four types of financial transactions are sales, purchases, receipts, and payments.
What are the 5 components of a financial statement? ›
The major elements of the financial statements (i.e., assets, liabilities, fund balance/net assets, revenues, expenditures, and expenses) are discussed below, including the proper accounting treatments and disclosure requirements.
