To effectively run a business, you need to become familiar with the three major financial statements of a company: the Income Statements, the Cash Flow Statement, and the Balance Sheet.
The Balance Sheet
The Balance Sheet shows the net worth of your business at a particular point in time. It shows how much is owned, how much is owed, and the amounts invested by the shareholders.
The Balance Sheet is based on the accounting equation:
Assets = Liabilities + Owners’ Equity which can also be mathematically rewritten as Owners’ Equity = Assets – Liabilities
Assets are anything a company owns with quantifiable value.
Liabilities refer to the amounts owed by a business at any one time. Liabilities are labeled as Short Term Liabilities or Long Term Liabilities. Short Term Liabilities are those that need to be paid back within a year. Long Term Liabilities are financial obligations that are due more than one year in the future.
Owners’ equity refers to the net worth of a company. It’s the amount of money that would be left if all assets were sold and all liabilities paid. This money belongs to the shareholders. so it is called ShareHolders’ Equity or Owners’ Equity.
The Income Statement
The Income Statement (also called Profit and Loss Statement) shows revenues, expenses, and profits for a particular period. It tells the lender if your business is profitable; the income statement establishes a company’s net income, which is described as total revenue minus total expenses.
The income statement shows the profit or loss over a period of time.
The Cashflow Statement
The projected Cashflow Statement shows how cash will flow inandn out of your business according to a timeline.