A Guide To Understanding Financial Statements

But depending on how you do your financial reporting, you may need a third type of statement. Usually, there are only three financial statements that are being frequently used by financial analysts.

The “charge” for using these assets during the period is a fraction of the original cost of the assets. A balance sheet provides detailed information about a company’s assets, liabilities and shareholders’ equity. This document shows the changes made to your company’s share capital, retained earnings, and accumulated reserves.

Bonds Payable and Mortgage Payables are the usual entrants here. But, if they already are due within one year, they get a transfer to current liabilities. Long-term investments that have a maturity date, when already due within one year, are transferred from Non-current Assets to Current Assets. Current Assets –These are the assets that are Cash or are easily realizable into Cash. Also, all receivables which can be collected within one year are considered Current Assets.

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But total assets can also include things like equipment, furniture, land, buildings, notes receivable, and even intangible property such as patents and goodwill. Here’s an example of what a balance sheet looks like if you’re a Bench customer.

You can try working through the numbers yourself for a company you’re watching. We’ll look at what each of these three basic financial statements do, and examine how they work together to give you a full picture of your company’s financial health. The lack of any appreciable standardization of financial reporting terminology complicates the understanding of many financial statement account entries. This circumstance can be confusing for the beginning investor. There’s little hope that things will change on this issue in the foreseeable future, but a good financial dictionary can help considerably.

business financials for dummies

Prepare one journal entry that credits all the expense accounts. (These accounts will have a debit balance in the general ledger prior to the closing entry.) Debit the income summary account for the total. There are two main purposes of the financial section of your business plan. First, this information is needed by potential investors, venture capitalists, angel investors and anyone else with a financial stake in your business. The second, and arguably, the most important purpose of the financial section of your business plan is for your own benefit, so you understand how to project how your business will do. Non-current assets are assets that can’t be converted to cash easily and won’t be converted within the next year.

Compiled Vs Certified Financial Statements: What’s The Difference?

Don’t expect financial statements to fit into a single mold. Many articles and books on financial statement analysis take a one-size-fits-all approach. Less-experienced investors might get lost when they encounter a presentation of accounts that falls outside the mainstream of a so-called “typical” company. Please remember that the diverse nature of business activities results in a diverse set of financial statement presentations. This is particularly true of the balance sheet; the income statement and cash flow statement are less susceptible to this phenomenon. Knowing how to work with the numbers in a company’s financial statements is an essential skill for stock investors.

This number tells you the amount of money the company spent to produce the goods or services it sold during the accounting period. A financial statements definition is, in the simplest sense, any document that helps show the financial state of your company. The actual items that meet this financial statements definition are generally much more specific, and each has an important role to play.

  • Although this brochure discusses each financial statement separately, keep in mind that they are all related.
  • By analyzing your income statement, you can pinpoint what aspects of your operation are correlated with high-growth periods and what aspects lead to stagnation.
  • She has a broad range of experience in research and writing, having covered subjects as diverse as the history of New York City’s community gardens and Beyonce’s 2018 Coachella performance.
  • Adjusting entries are required to update certain accounts in your general ledger at the end of an accounting period.
  • GoCardless is used by over 60,000 businesses around the world.
  • This guide will teach you how to sort through the many forms to find the data you’re seeking.

While there are a million and one financial tricks you can play to keep a business running, cash is still king and must be accounted for. Finally, don’t confuse a good business with one that shows high profits. As Uber’s recent IPO and high valuation prove, you can still have a solid business even while posting operating losses in the billions of dollars per year. You can think of the relationship between the income statement and balance sheet in terms of getting tests at the doctor’s office.

Each type of financial statement will often have a knock-on effect on another type. As such, you cannot gain a full overview of a company with just one type of statement. You must consolidate the data from one statement with the data from another statement to gain a deeper understanding of your company’s financial health. A statement of cash flow shows the inflows and outflows of cash and the ending balance during a period. The statement of cash flows has three sections operating activities, investing activities and financing activities. To become a savvy investor, you should assess financial statements through many lenses. Look at the data for indicators of certain patterns, and also as a broader view of company health.

Auditing For Dummies

An accountant’s letter is an auditor’s written statement attesting to a company’s financial reporting and overall financial position. The contents of income statements may vary depending on the nature of the business. What’s important here is that the amounts should be properly labeled. If a company has an inventory turnover ratio of 2 to 1, it means that the company’s inventory turned over twice in the reporting period.

business financials for dummies

To read a balance sheet, you need to analyze your business’s reported assets, liabilities and equity to get a clear picture of what your company owns and owes on a single date. In either case, your cash flow statement has shown you a different side of your business—the cash flow side, which is invisible on your balance sheets and income statements. Most small businesses track their financials only using balance sheets and income statements.

July Income Statement

Some income statements show interest income and interest expense separately. The interest income and expense are then added or subtracted from the operating profits to arrive at operating profit before income tax. A company’s balance sheet is set up like the basic accounting equation shown above.

So, if you want to be a savvy investor, how do you go about it? You can use the P&L statement along with the balance sheet to calculate the return you are earning on your investment. If you want to learn how financial statement analysis works, keep a list of ratio formulas on hand.

Your financial statements are dynamic reports full of insights just waiting to be extracted and used to achieve your business objectives. A solid understanding of each statement allows you to be proactive instead of reactive. The book goes beyond a mere laundry list of terms and definitions, referring to actual financial statements. I appreciate the clear and useful walk-through of the various ratios and what they tell us about a company’s condition.

Non-current assets include both tangible and intangible assets. If you’re just getting started and want to focus on the basics, begin with some of the most important ratios.

It’s the money that would be left if a company sold all of its assets and paid off all of its liabilities. This leftover money belongs to the shareholders, or the owners, of the company. We all remember Cuba Gooding Jr.’s immortal line from the movie Jerry Maguire, “Show me the money! They show you where a company’s money came from, where it went, and where it is now. Financial statements, though often feared as a very intimidating portion of small business accounting, are just a matter of putting the trial balance amounts onto properly formatted statements. Learn how to prepare these documents you’ll need for shareholders, potential financiers and your own insight. Most non-current assets reported on a balance sheet are calculated with depreciation, which refers to the cost of the asset over its useful lifespan.


You don’t want to be surprised that you only collect 70 percent of your invoices in the first 30 days when you are counting on 100 percent to pay your expenses. Some business planning software programs will have these formulas built in to help you make these projections. Although this brochure discusses each financial statement separately, keep in mind that they are all related. Cash flows provide more information about cash assets listed on a balance sheet and are related, but not equivalent, to net income shown on the income statement.