Financial statements are used by so many different types of people from investors, to creditors, managers and even employees. These statements are proven useful tools that provide valuable information about a business enabling the user of the statements to make the most appropriate business decisions.
Four Basic Financial Statements
There are four basic financial statements in accounting:
1. Balance Sheet
2. Income Statement
3. Retained Earnings Statement
4. Statement of Cash Flows
The Purpose of Each Financial Statement
The balance sheet is used to show your business is doing at a given point in time. The balance sheet shows the business assets, liabilities and equity. Assets are anything of value owned by the business like equipment, office furniture and vehicles. Liabilities are the business obligations to other entities like a loan. Assets must always equal liabilities plus equity and if we look at the algebraic equation for this it would be A=L+E, A being assets, L being liabilities and E being equity. With the information on a balance sheet, the business owner can identify and analyze trends in payables and receivables. The owner can determine if receivables can and should be collected sooner as well as seeing what monies are still owed to the company. Balance sheets are also used by businesses to provide the basic accounting information to financial lenders when applying for loans or lines of credit.
The income statement shows a company’s financial status, how much money your company is bringing in. A company can track profits and expenses which is useful in managing the performance of the business. Like the balance sheet, the income statement is also used to provide basic information to lenders and creditors.
The retained earnings statement is used to show income from the inception of the company in the form of dividends, how much was put toward the growth of the company. Like the balance sheet,
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