Understanding business financial statements could be daunting for some taxpayers, especially if they are not equipped with the right kind of knowledge in the field of personal finance.Unfortunately, the importance of understanding such financial statements go beyond simply filing the paperwork for tax returns. Companies require people to submit their financial statements when they are interested in buying a property or asset, or when they are filing for a business or personal loan. Financial statements are also used as a basis by individuals to determine your profitability, especially if they are interested in investing in your business. Here are the three types of financial statements that you should know how to read:
The balance sheet is the first of the three types of financial statements that predict a company’s health. According to The Economic Times, the balance sheet is computed either every quarter, six months or a year (fiscal or calendar). While it consists of other aspects, your assets and liabilities are mainly used to obtain the total for your balance sheet.
An income statement focuses on your income. It reflects your profits and losses and is derived from the computation of your earnings versus your expenditures. According to Investopedia, public companies are required to divulge information about their income statement, not just to investors but also to the general public. This statement is also a requirement when filing an annual return and 10-K.
Cash Flow Statement
As its name suggests, the cash flow shows how you incur funds and dispense it. It focuses on the “how” rather than “where.” Knowing your cash flow is critical, whether you are a business or a household as it details the results of your financial activities, specifically whether you’re saving up enough and turning a profit, or incurring further losses through debts.
These are just the three types of business financial statements that need to be prepared for you by an accountant. You can also use automated bookkeeping tools to streamline your cash flow monitoring and internal operations to minimize errors and help you save time.