It does not matter if you are running a small, medium company or a large corporation, or organization, whether profitable or not for profit, you are required to prepare the financial statements to record all of the financial-related transactions that occur daily in your organization to accounting system so that you could establish the financial statements.
The financial statements that you are going to prepare could be monthly quarterly or annually.
The period of the financial statements to be prepared is determined by your organization’s management or board of directors or some time it is also required by your regulator.
Under US GAAP or IFRS accounting standard, your organization needs to prepare 4 types of financial statements including income statement, balance sheet, statement of changes in equity, statement of cash flow with the noted to financial statements.
Following are the 4 required financial statements that you should prepare under US GAAP or IFRS:
- Balance Sheet
- Income Statement
- Cash Flow
- Owners’ Equity
- Noted to financial statements
These financial statements should be prepared in the format proposed or allowed by GAAP or IFRS.
These statements provide all the organization’s financial transactions and give full information about the performance of the company during the financial period so that all of the stakeholders could use that information to help them make the right decision.
The key stakeholders that normally use the company’s financial information include:
- Shareholders
- Creditors
- Debtors
- Government Authorities
- New investors
Employees and management are of the company are also the important stakeholders who use the company’s financial information.
Each of the above-mentioned financial statements records different information of the company and shows different information to its users with a different purpose.
Here is the detail of each of the financial statements:
1) Balance Sheet
This statement provides the company’s total assets, liabilities, and equity at the end of the reporting period.
For example, if you want to see how much is your company’s total assets, you can check this financial statement for the period you want to know.
In the formula, you can describe the balance sheet as:
Assets = Liabilities + Capital
If we further expand this formula, we will get two categories of assets and two of liabilities as follows:
Non-Current Assets + Current Assets = Non-Current liabilities + Current Liabilities + Capital
If you analyze the asset side of the balance sheet you will see that it is divided into two parts. In the non-current section, we add all those items which are capital in nature and have a useful life of more than one year while the current assets have a useful life of less than one year.
The same logic is applied to the liabilities side of the balance sheet.
All Liabilities which are payable within one year come under current liabilities and which have a payable period of more than one year are comes under the head of non-current liabilities.
Example of Balance Sheet:
2) Income Statement:
It is one of the most important reports for any organization, as it shows the Profit or loss for a financial period of time. In other words, it sums up all the revenues and expenses of an entity and reports profit or loss.
It can be expressed in this formula:
Net Profit = Total Revenue – Total Expenses
Example of Income Statement:
3) Cash Flow Statement
A cash base statement that shows the changes in the balance sheet and Income statement that affect cash & cash equivalents.
Or the statement which shows the total cash inflow and outflow of an Organization is termed as cash flow statement.
4) Owners’ Equity:
It is a statement of the owner’s owner’s ship in the business like it shows the amount owner has invested in the business less the amount of money withdrawn by the owner.
The formula will be Owner’s Equity = Assets – Liabilities
Sample of Changes in Stockholder Equity
