Fundamental Accounting : How To Start Your Business

When starting a business, it is essential to understand and prepare the three primary financial statements that are used to track and analyze the company’s financial performance. These three financial statements are:

Income Statement: Also known as a profit and loss (P&L) statement, this document shows the revenue, expenses, and net income or loss of the business over a specific period, such as a month, quarter, or year. The income statement helps business owners understand whether the company is profitable or not by subtracting the total expenses from the total revenue to determine the net income or loss.

Balance Sheet: The balance sheet presents the company’s financial position at a specific point in time, usually at the end of a quarter or fiscal year. It lists the company’s assets, liabilities, and equity, and it must always balance, meaning that the sum of assets must equal the sum of liabilities and equity. The balance sheet helps business owners understand the company’s overall financial health and its ability to pay its debts.

Cash Flow Statement: The cash flow statement shows how the company generates and uses cash over a specific period, such as a quarter or fiscal year. It breaks down the company’s cash inflows and outflows into three categories: operating activities, investing activities, and financing activities. The cash flow statement helps business owners understand how much cash the company has on hand and its ability to fund future growth and pay its debts.

The income statement shows the company’s profitability, the balance sheet shows its financial position, and the cash flow statement shows its liquidity. Understanding these three financial statements is crucial for business owners when making important financial decisions, securing funding, and analyzing the company’s financial health.