What Are Financial Statements?
Financial statements are reports that summarize a business’s financial activity over a period of time. They help business owners, investors, and authorities understand how a business is performing.
In simple terms, financial statements show where money comes from, where it goes, and what remains.
Why Financial Statements Matter
Financial statements are important because they:
- Show whether a business is profitable
- Help with tax reporting
- Support financial planning and decision-making
- Create transparency and trust
Without financial statements, it is difficult to understand the true financial position of a business.
The Three Main Financial Statements
Most businesses use three main financial statements.
1. Income Statement (Profit and Loss Statement)
The income statement shows:
- Revenue earned
- Expenses incurred
- Profit or loss over a period
It answers one key question:
Did the business make money?
2. Balance Sheet
The balance sheet shows:
- Assets
- Liabilities
- Equity
It provides a snapshot of what a business owns and owes at a specific point in time.
3. Cash Flow Statement
The cash flow statement tracks:
- Cash coming in
- Cash going out
It shows whether a business can pay its bills and survive day-to-day operations.
How Financial Statements Work Together
Each statement provides different information, but together they give a complete picture of financial health.
For example:
- A business can be profitable but still run out of cash
- Strong assets with high liabilities may indicate risk
Understanding all three statements is essential.
Where Beginners Should Start
If you are new to accounting, start with understanding what accounting is and what accounting is and learning basic accounting terms.
👉 Read first: What Is Accounting? A Simple Explanation for Beginners.