Understanding about financial statements
A financial statement is a summary report which depicts how the organization has used the finances entrusted to it. It explains the current financial position. Three basic statements are Income statement, cash flow statement and the balance sheet. They are also called as business financials.
Types of statements
Main types of financial statements are listed below:
- Balance sheet: This represents the organization’s financial position at particular date. It consists of following 3 elements:
Equity – Equity is what the company owes to its shareholders or owners. This is the amount which remains with the business after it has used up all its assets to pay off the liabilities. Hence, equity is Assets – Liabilities.
Assets- Assets are something which the business controls or owns.
Liabilities- Liabilities are something which the organization owes to others like creditors, bankers, etc.
- Income statement: This is also known as statement of profit and loss. It reports the organization’s performance with respect to net loss or profit over a specific period of time. It includes 2 elements:
Income- It is what the company has earned during the particular period like dividend income, sales revenue, etc.
Expense- It is the cost incurred over a period by the business like wages, depreciation, etc.
- Cash flow statement: It represents the cash movement and bank balances. It also has 2 segments- Operating activities (cash flow the main or primary activities of the business) or investing activities ( cash flow sale and purchase of assets)
- Statement of retained earnings: It is related to the movement of the owner’s equity during a particular period.
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