Financial statements are summaries of important financial accounting data regarding your company. The three primary forms of financial statements are the balance sheet, cash flow statement and income statement.
Together, they paint a clear picture of your company's financial situation for you and other investors.
We'll discuss the functions of these three fundamental financial statements and how they all fit together to provide you with a comprehensive view of your company's financial situation.
Balance Sheet
A balance sheet is a statement of finance that lists the liabilities and assets of a corporation at a certain point in time. One of the three primary financial statements—the other two being the cash flow statement and income statement —is used to assess a company's performance.
Your business will determine how frequently your bookkeeper creates a balance statement for you. For example, some firms receive financial statements daily or weekly, while others only receive balance sheets once a year.
For instance, banks transfer a lot of money, so they create a balance sheet each day. A tiny Etsy store, meanwhile, could only receive a balance sheet every three months.
Assets, liabilities, and equity are the broad categories used to categorize balance sheets.
Basics of Balance Sheets
Your practice's financial situation at a specific moment is captured in your balance sheet, often known as a statement of financial condition. Your assets, liabilities, and equity are listed in this financial statement as of a certain date.
The structure of a balance sheet illustrates the fundamental accounting formula:
Assets = Liabilities + Owner's Equity
Assets
The items that your practice possesses and have a monetary worth are its assets. Your assets consist of tangible goods like cash, stock, privately held real estate and equipment, marketable securities (investments), pre-paid costs, and money owing to you (accounts receivable) from payers.
In addition, intangibles with value, like registered patents or trademarks, are also considered assets.
Liabilities
All of the money that your practice owes to others is reflected in your liabilities. Some loans, accounts payable, salaries, taxes, and other debts fall under this category. Similar to assets, liabilities are classified according to their due date or the period you anticipate paying them.
Owner's Equity
Owners' equity, also known as net assets or net worth, refers to the assets that are left over after subtracting all of your debts. Simply put, it is the amount of money you would have left over after paying off all your debts and selling your practice and all of its assets. A practice's value might be challenging to determine.
When considering purchasing or selling an existing rule, owners' equity should not take the place of a thorough expert appraisal because it only sometimes reflects current market worth.
FINAL INSIGHT
You may better comprehend your financial situation and make more educated decisions about your practice by being aware of the many sorts of financial records and the data they each contain.
This piece is the first in a series to help you understand your firm's financial accounts.
