What is a financial statement?
Financial statements are concise collections of reports that give a high-level overview of a company’s financial health. They’re presented in an easy-to-understand and structured manner. These statements keep your accounting records accessible and are generated monthly, quarterly, or yearly, including annual financial reports. They also help a business make better decisions about the organization’s economic growth.
Since financial statements are crucial for a growing organization, it’s highly recommended that you use financial audit software to ensure a seamless financial audit process.
Types of financial statements
There are four main types of financial statements.
- Balance sheet: A balance sheet is a financial statement that documents the liabilities, assets, and shareholders’ equity at a given point in time.
- Income statement: The income statement is a cumulative financial statement of a business’s revenue and expenses over a period of time and is also known as a profit and loss statement..
- Statement of equity: A statement of equity documents the change in the owner’s equity, share capital, and retained earnings over a financial period.
- Cash flow statement: A cash flow statement is a financial statement that provides a cumulative report on a business’ cash earnings from both its internal operations and external investments.
Uses of financial statements
Business owners and organizations use financial statements to determine an organization’s financial performance and make informed decisions.
- Senior management of an organization needs periodic financial statements to make important business decisions and carry out a cost-benefit analysis of their investments.
- Employees of an organization use financial statements to discuss their compensation and promotion demands with their employers.
- Prospective investors assess a company’s financial statements to determine if it’s viable to invest in the business.
- Financial institutions and banks need a business’s financial statements to decide their loan extensions, capital grants, and other significant expenditures.
Basic elements of financial statements
Every financial statement should contain a detailed record of an organization’s revenue, investments, and financial holdings. There are five basic elements of a financial statement that help cover these aspects.
- Assets: Assets are defined as the organizational resources with current and future economic viability. Assets can be non-depreciating (current assets) or depreciating (fixed assets) in nature. The most common examples of assets are land, building, cash, IT equipment, and property.
- Liabilities: Liabilities are defined as resources currently in control of an organization that’ll cause an outflow of resources in the future. Examples of liabilities in financial statements include loans, payable salaries, overdue interests, and payable taxes.
- Equities: Equity is the residual amount after liabilities are deducted from the assets. It can increase or decrease depending on the change in liabilities or assets. Equity resides in items such as share capital, dividend payments, and retained earnings or losses.
- Revenues: The revenue of a company is defined as the net increase in the economic resources in a particular period. Revenues in the financial statements refer to the sales revenues, bank deposit interests, and dividends from equity investments.
- Expenses: Expenses are defined as the costs incurred by a company. Common examples of expenses in financial statements are marketing, rental, transportation, and maintenance.
Best practices for writing a financial statement document
Financial statements need to be clear and concise. They should contain all of a company's key financial information for a given period. The data in a financial statement needs to be readable by everyone responsible or impacted. Below are some essential practices that need to be followed to create a well-defined financial statement.
- Verify if the assets balance the liabilities and equity statements.
- Use financial audit software to reduce fraudulent transactions and maintain compliance.
- Find the breakeven point for sales forecasts and business expenses.
- Update and review the accounting statements, based on which the financial statement is prepared, for any errors that might have crept in.
Financial statements vs. financial reports
Financial statements and financial reports are different from each other, although they’re sometimes used interchangeably. A financial statement is an element of financial reports. A financial report is a board categorization including periodic revenue reports, cash flows, and financial statements.
Financial statements further provide a concise report of assets, liabilities, and equity to the stakeholders.
Dibyani Das
Dibyani is a former Content Marketing Specialist at G2. In her free time, you can find her scribbling fanfiction and brushing up her knowledge on various fandoms (Harry Potter, mostly).
