If you own a small business, you understand the importance of keeping your financial information organized. There are four basic types of financial statements used to do this: income statements, balance sheets, statements of cash flow, and statements of owner equity. You probably also know that bookkeeping can be a headache. If you are trying to make managing your company as easy and seamless as possible, it’s helpful to understand the four most common business financial statements. You can even download templates of these statements. Learn more about the details of the four statements and other components of financial reporting and you’ll have a greater understanding of what’s needed from your accounting team. One of the four types of financial reports is the income statement, which shows net income or net loss. This type of statement tracks all of the money coming in and all the money going out. Money paid out is called expenses, and money coming in is called revenue. When the expenses exceed the revenue, the income statement will show a net loss. The income statement is broken down into categories, including: Operating expenses include things like advertising and rent for office space. Non-operating expenses can include a one-time purchase and interest on borrowed money. Sales encompass the cost of all goods sold. The balance sheet is another one of the four types of financial statements, and of all the types of financial statements out there, this one seems to be the most ignored. Entrepreneurs are fascinated by the income statement but turn a disinterested eye to other components of financial reporting like the balance sheet. It’s unfortunate, too, because this is one of the most important types of financial reports. The balance sheet contains assets, liabilities, and owners’ or shareholders’ equity. The assets include cash, property, inventory, and anything else owned by the company. Assets are listed on the left side of the balance sheet. Liabilities and equity are listed on the right side. Liabilities include accounts payable or any type of payment made on a long-term loan. The owners’ or shareholders’ equity is established when the amount of liabilities is subtracted from the amount of assets. The reason it’s called a balance sheet is because the formula should always look like this: The third of the four major financial statements is the statement of cash flow. This business financial statement tries to accomplish one thing: tell you where all of your cash went. The components of financial reporting can get a little complicated on this one, so it may be hard to understand if you don’t have four years of accounting education. The number of categories on this statement will be different depending on the size of the company. For larger companies, the categories include: For smaller companies, there are only two categories: cash inflows and cash outflows. The basic principle of the statement of cash flow is to know and understand exactly where cash is flowing in from and where it is flowing out to. It enables the company to see if they are spending more than they are earning or vice versa. If the amount of cash is consistently more than the net income, it means the company’s net earnings are “high-quality.” If there are any changes in the owner’s equity between accounting periods, they are listed on the statement of owner’s equity, the fourth of the major business financial statements. The key components listed on this statement include: The additions and subtractions are for a particular period and can include things like net income, dividend payments, and withdrawals. So what are the four basic financial statements you need? Typically, you’ll need all four: the income statement, the balance sheet, the statement of cash flow, and the statement of owner equity. By preparing these four accounting financial statements, you will be able to see how well your company’s finances are doing or find areas that need improvement. If you don’t have the required time or understanding of financial statements, online services like ours can help. If you’re looking for an outsourced firm, be sure to check out our financial team. Written by Eddy Hood
Income Statement
Balance Sheet
Statement of Cash Flow
Statement of Owner’s Equity
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What are the 4 important types of financial statement? ›For-profit businesses use four primary types of financial statement: the balance sheet, the income statement, the statement of cash flow, and the statement of retained earnings. Read on to explore each one and the information it conveys.
What are the 4 basic financial statements What is the purpose of each? ›They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholders' equity. Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time.
How do the four financial statements relate to each other? ›All four accounting financial statements accurately portray the company's overall financial situation. The income statement records all revenues and expenses. The balance sheet provides information about assets and liabilities. The cash flow statement shows how cash moves in and out of the business.
Which of the 4 financial statements do you think is the most important and useful in predicting a company's success? ›Many analysts believe that the statement of cash flows is particularly useful in predicting future cash flows that may be available for payment of debt to creditors and dividends to investors.
What is the purpose of the financial statements? ›"The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions." Financial statements should be understandable, relevant, reliable and comparable.
What is the purpose of each financial statement what goes on each statement? ›The income statement illustrates the profitability of a company under accrual accounting rules. The balance sheet shows a company's assets, liabilities, and shareholders' equity at a particular point in time. The cash flow statement shows cash movements from operating, investing, and financing activities.
What are the four elements of financial statements identify and explain? ›Elements of a balance sheet are assets, liabilities, and equity. Elements of an income statement are revenue and expenses. And elements of a cash flow statement are operating activities, investing activities and financing activities.
Which of the four financial statements should be prepared first? ›The income statement, which is sometimes called the statement of earnings or statement of operations, is prepared first. It lists revenues and expenses and calculates the company's net income or net loss for a period of time.
Who are the 4 users of financial statements? ›The users of financial statements include present and potential investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the public. They use financial statements in order to satisfy some of their different needs for information.
What are the key financial reports? ›
The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.
Which is not one of the 4 types of financial statements? ›The audit report is not one of the four basic financial statements.
What are the four basic financial statements? ›If you own a small business, you understand the importance of keeping your financial information organized. There are four basic types of financial statements used to do this: income statements, balance sheets, statements of cash flow, and statements of owner equity.
Why are the four financial statements vital for the decision-making process? ›Key Takeaways. Financial statements provide a snapshot of a corporation's financial health, giving insight into its performance, operations, and cash flow. Financial statements are essential since they provide information about a company's revenue, expenses, profitability, and debt.
Does cash go on the balance sheet? ›Cash, accounts receivable and inventory are listed under current assets on a balance sheet. Property (which includes intellectual property) is listed under non-current assets. Liabilities. These consist of loans, debt and accounts payable — what your company owes.
Are there 3 or 4 financial statements? ›For-profit primary financial statements include the balance sheet, income statement, statement of cash flow, and statement of changes in equity.
What are the 3 important financial statements in accounting? ›The income statement, balance sheet, and statement of cash flows are required financial statements.
What are the four types of financial transactions? ›There are four main types of financial transactions that occur in a business. These four types of financial transactions are sales, purchases, receipts, and payments.
What are the 5 statements of accounting? ›Statement of financial position (balance sheet); Statement of income and expense (profit and loss account); Statement of cash flows (cash flow statement); Statement of changes in equity; and.