A financial statement isn’t just a single document. All sorts of different statements are needed to define the state of your business’s finances.
What is a financial statement?
A financial statements definition is, in the simplest sense, any document that helps show the financial state of your company. The actual items that meet this financial statements definition are generally much more specific, and each has an important role to play. Each type of financial statement will often have a knock-on effect on another type. As such, you cannot gain a full overview of a company with just one type of statement. You must consolidate the data from one statement with the data from another statement to gain a deeper understanding of your company’s financial health.
The 5 types of financial statements you need to know
There are several crucial financial statement documents that every business needs. It’s not just a matter of compliance or best practice; they are vital tools to staying on top of your figures. Here are the key documents you need to know about:
1. Income statement
Arguably the most important. A business needs to keep a very close eye on profit and money coming in, and that’s precisely what an income statement does. An income statement may also be known as a profit and loss statement, showing your businesses income and outgoings over a set period. The income statement takes revenue, losses, and expenses into account, so it can show whether your company has turned a profit or has missed its mark.
2. Cash flow statement
The cash flow statement shows how money enters and leaves your business, so you can see what you have available as working capital at a particular time. A cash flow statement is essential for showing you how quickly you could source cash if you needed it, as it doesn’t take into account things like raw materials or purchases made – but not yet paid for – on credit.
3. Balance sheet
The balance sheet displays three key things: your assets, your liabilities, and your equity. The balance sheet can show the current value of a business for the period it covers. Looking at your balance sheet can help you understand if you can meet your financial obligations.
4. Note to Financial Statements
This is a requirement of the IFRS (International Financial Reporting Standards) and gives greater context around the information contained in your other financial statement documents. For example, your assets may be listed in the balance sheet, but your note to financial statements document is where you will explain precisely what those assets are. The information in this document is required to ensure you are compliant with standards and regulations.
5. Statement of change in equity
This document shows the changes made to your company’s share capital, retained earnings, and accumulated reserves. For a sole trader, it shows changes to the owners equity. For a partnership, it shows the changes between both partner’s equity. In the case of a company, then the statement of change in equity shows how equity share has changed among all the shareholders.
What is the order of financial statements?
The usual order of financial statements is as follows:
Cash flow statement
Statement of changes in equity
Note to financial statements
This is the order in which each document is produced within your business’s accounting cycle to create a complete picture of a company’s finances.
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