Financial statements are meaningful written records that allow you to diagnose your company’s financial strengths and weaknesses. Your accountant usually prepares complete statements annually, but you should review your income statement at least quarterly.
Types of Financial Statements
Financial statements include the profit and loss (P&L) statement (also known as the income statement), the cash flow statement, and the balance sheet. These documents provide a story of a business’s financial decisions, and the results of those decisions, during a specific period. As the practice conducts its business, its accounting system (e.g. QuickBooks) tracks, organizes, and records the financial transactions using a chart of accounts. That information is used to prepare the business’s financial statements.
| P&L Statement | Cash Flow Statement | Balance Sheet |
| Revenues | Operations | Assets |
| Expenses | Investments | Liabilities |
| Profit/Loss | Financing | Equity |
P&L Statement
The P&L statement lists and categorizes the various revenues and expenses that result from operating the business during a given period, whether that’s a year, a quarter, or a month. When the next period starts, the income statement resets all amounts to zero. The sum of revenues (+) and expenses (-) represents a company’s net income or net loss during the period. The primary purpose of the income statement is to demonstrate a practice’s ability or inability to generate profits and describe how the profit or loss arose. The P&L answers the question, “How much money did we make or lose?”
Cash Flow Statement
The cash flow statement starts with the net income or net loss noted in the P&L statement at the beginning of the period. It shows all sources and uses of a company’s cash during the accounting period in three categories: operations, financing, and investing. The last line shows current cash. The cash flow statement provides aggregate data for all cash inflows and outflows and represents the conversion of accrual to cash. It provides clarity about a company’s financial health. The cash flow statement answers the question, “What did we do with the money?”
Balance Sheet
The balance sheet is a “snapshot” of the assets, liabilities, and owner equity in a business at a point in time, rather than over a certain period. It illustrates a company’s financial position by demonstrating what the company owns and what it owes as of the date of the report. It is balanced by the equation: Assets minus liabilities equals owner equity, also called net worth. Banks use balance sheets to calculate ratios for loan eligibility and terms. These ratios help determine whether a company qualifies for additional credit or loans. The balance sheet answers the question, “What do we own, what do we owe, and what is our net worth?”
Final Thoughts
Financial reports provide a lot of information about a business’s strengths and weaknesses. The P&L focuses on revenues and expenses during a particular period and shows the company’s profit. The cash flow statement measures how well a company generates cash, and how it is used. The balance sheet provides an overview of assets, liabilities, and stockholders’ equity as a snapshot in time.
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