Financial Reporting is essential to any business. Financial reports may consist of numerous different types of reports, but the primary reports are; balance sheet, income statement (sometimes referred to as a Profit and Loss or P&L), and cash flow statement. Business owners should be able to read financial reports. The reports are critical to the operations of the business.
The balance sheet contains your assets, liabilities, and equity. The balance sheet formula is assets=liabilities + equity. It is important that these items are recorded correctly. It is important that the company’s assets and liabilities are correctly recorded. There are numerous factors that depend upon this information such as depreciation of your assets and long term loans. If your company is ever evaluated, they are going to check your balance sheet for the assets and liabilities of the organization. I look at the balance sheet as the long term financial report. This is the report that proves the net worth of the company.
The income statement (P&L) is essential to the operation of the business. The accountant or bookkeeper will spend most of their time categorizing income and expenses. Proper categorization of these items are critical to accurate reporting. This report is the paycheck of the business. This report is going to show how much money is being made periodically, whether you run this report each day, month, quarter, or year.
Statement of Cash Flows is exactly what it sounds like. This is the report of your cash flow. This report shows any changes in balance sheet and income statement accounts that affect cash or cash equivalents. This report is critical as an analysis tool to determine the ability for the organization to pay bills. It determines the viability of the organization. This report is not ran very often unless cash on hand is a concern that needs to be monitored closely. It would be reviewed carefully for anyone taking an interest in purchasing stock or becoming an investor in the company.
Financial Statements are critical in determining the health of an organization. This is only a very brief overview. However, it is important that all company shareholders/owners understand how to properly read financial statements. For example, they are used by banks to determine risk and other factors when it comes to loans. I hope this helps a little, but Astute Bookkeeping is available to help with properly reading financial statements if needed.
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