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.
