Basic Accounting and Financial Statements you need to Know

A business consists of many complicated deals and only the owners would know how to make and break the plans. There are three basic accounting statements that help to make your business a successful one. If your business is running currently, these financial statements will include present transactions, past transactions and your future targets.

Understanding financial statements

The three financial statements necessary for business are the cash flow statement, the income statement, and the balance sheet.

The cash flow statement means the declaration of cash flows. It includes the total cash outflows and cash inflows of the business. For example, if a business owner has invested a certain sum, it shows as investments with the date. It is almost equal to the income statement. The numbers will be mentioned in the cash terms in cash flow statement.

It is divided into three groups. They are investing, financing and operating. It covers all the transactions that include those that are not present in the income statement. The operating cash flows means, the total cash spent for inventory and operating expenses and the amount of cash fetched in through the sales. The term investing cash flow refers to the amount of additional investments and stays as assets for the organization. Some of the examples to explain this term are leasehold improvements, purchase of equipment or machinery.  The other important term financing cash flow means cash fetched in from investors and lenders and amount of cash paid to funders as dividends or to repay the debts that are acquired from them.

What is an income statement and what does it tell about my business?

The income statement is popularly termed as profit and loss report. It shows the cost of running the business, sales revenues, profit for a particular period, taxes, and other expenses involved in the business for certain periods of time. If you look at the income statement, you could watch quarterly statements mentioning the condition of the business. The details will help to find out whether the business is in good status. The annual data is used for comparison. The business owners identify their brand or product sales by comparing their five years income statement. It helps them to know about the productivity of the firm. They can easily derive profit margin ratios from the income statement.  In addition, if you want to know about net income levels, sales levels, and profit margin, just check out the income statement, and you can easily get a brief idea about these.

What is a balance sheet and what does it tell about my business?

The balance sheet is the exact snapshot of your business. It reveals the financial status for a particular period of time in a clear way. The yearly balance sheets provide the value of liabilities, owner’s equity or shareholder’s equity, assets and other deep details of the business. It analyses each category in brief which you can also always conclude the status by looking at the balance sheet.

The investors use the balance sheet and income statement for deriving ratios like return on equity, invested capital returns and return on assets. These figures help to determine the status and help in forecasting the profits of the business.

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