If you own a small business, you understand the importance of keeping your financial information organized. There are four basic types of financial statements used to do this: income statements, balance sheets, statements of cash flow, and statements of owner equity. You probably also know that bookkeeping can be a headache. If you are trying to make managing your company as easy and seamless as possible, it’s helpful to understand the four most common business financial statements. You can even download templates of these statements. Learn more about the details of the four statements and other components of financial reporting and you’ll have a greater understanding of what’s needed from your accounting team. One of the four types of financial reports is the income statement, which shows net income or net loss. This type of statement tracks all of the money coming in and all the money going out. Money paid out is called expenses, and money coming in is called revenue. When the expenses exceed the revenue, the income statement will show a net loss. The income statement is broken down into categories, including: Operating expenses include things like advertising and rent for office space. Non-operating expenses can include a one-time purchase and interest on borrowed money. Sales encompass the cost of all goods sold. The balance sheet is another one of the four types of financial statements, and of all the types of financial statements out there, this one seems to be the most ignored. Entrepreneurs are fascinated by the income statement but turn a disinterested eye to other components of financial reporting like the balance sheet. It’s unfortunate, too, because this is one of the most important types of financial reports. The balance sheet contains assets, liabilities, and owners’ or shareholders’ equity. The assets include cash, property, inventory, and anything else owned by the company. Assets are listed on the left side of the balance sheet. Liabilities and equity are listed on the right side. Liabilities include accounts payable or any type of payment made on a long-term loan. The owners’ or shareholders’ equity is established when the amount of liabilities is subtracted from the amount of assets. The reason it’s called a balance sheet is because the formula should always look like this: The third of the four major financial statements is the statement of cash flow. This business financial statement tries to accomplish one thing: tell you where all of your cash went. The components of financial reporting can get a little complicated on this one, so it may be hard to understand if you don’t have four years of accounting education. The number of categories on this statement will be different depending on the size of the company. For larger companies, the categories include: For smaller companies, there are only two categories: cash inflows and cash outflows. The basic principle of the statement of cash flow is to know and understand exactly where cash is flowing in from and where it is flowing out to. It enables the company to see if they are spending more than they are earning or vice versa. If the amount of cash is consistently more than the net income, it means the company’s net earnings are “high-quality.” If there are any changes in the owner’s equity between accounting periods, they are listed on the statement of owner’s equity, the fourth of the major business financial statements. The key components listed on this statement include: The additions and subtractions are for a particular period and can include things like net income, dividend payments, and withdrawals. So what are the four basic financial statements you need? 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. If you don’t have the required time or understanding of financial statements, online services like ours can help. If you’re looking for an outsourced firm, be sure to check out our financial team. Written by Eddy Hood
Income Statement
Balance Sheet
Statement of Cash Flow
Statement of Owner’s Equity
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What are the 4 important types of financial statement? ›- 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 basic financial statements What is the purpose of each? ›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 four 4 elements of financial statement? ›Financial statements can be divided into four categories: balance sheets, income statements, cash flow statements, and equity statements.
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.
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.
How are the four financial statements connected? ›All four financial statements are interrelated, and users must look at them jointly. Business transactions are intricate, and they influence many items in the financial reports simultaneously. For example, the profit figure for the year appears in both, the Income Statements and the Statement of Changes in Equity.
What are the key 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 four financial statements appear in most annual reports? ›The four financial statements contained in most annual reports are: (1) balance sheet; (2) income statement; (3) cash flow statement; and (4) statements of shareholders' equity. The balance sheet provides an overview of company assets and liabilities. The income statement provides an overview of sales and expenses.
Why are financial statements important? ›
The purpose of financial statements is to allow businesses to understand their financial standing. This provides a summary of previous financial data which can help businesses to make informed decisions. This data can also inform other individuals or companies which may potentially have a state in the business.
What are the four activities of accounting? ›First Four Steps in the Accounting Cycle. The first four steps in the accounting cycle are (1) identify and analyze transactions, (2) record transactions to a journal, (3) post journal information to a ledger, and (4) prepare an unadjusted trial balance. We begin by introducing the steps and their related documentation ...
How do financial statements help in decision making? ›As financial statements are regularly generated by a business and a strict format is followed, it makes it easy for investors to compare and contrast thereby allowing for easy decision-making. Investors do not want to undertake big risks as they risk losing everything they invest in your business.
What are the four key elements of the financial planning process? ›- Budgeting and saving goals within a financial plan.
- Investing as part of a financial plan.
- Estate planning goals within a financial plan.
- Insurance's role within a financial plan.
Your annual report should include four main components: the chairman's letter, a profile of your business, an analysis of your management strategies, and your financial statements.
What is the difference between operating reports and financial reports? ›Financial reports show historical data, but they provide insight into how a business spends its profits, whether they are reinvested into the business, and whether the company can sustain future growth. Operational reports provide business intelligence on how efficiently a company performs.
What are the 3 main 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 5 components of the 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.
What are the 5 statements of accounting? ›Statement of financial position (balance sheet); Statement of income and expense (profit and loss account); Statement of cash flows (cash flow statement); Statement of changes in equity; and.
What are the 5 methods of financial statement analysis? ›There are five commonplace approaches to financial statement analysis: horizontal analysis, vertical analysis, ratio analysis, trend analysis and cost-volume profit analysis.