A useful tool in analyzing your financial position and performance is a financial statement. They have four main components:
- External Statements
- Internal Statements
- Income Statements
- Balance Sheet
- External Financial Statement
- Internal Financial Statement
- The Balance Sheet
- The Income Statement
The external financial statement is used for purposes of external reporting. It is a report used for tax authorities, significant partners looking for financial information, and investors. These financial statements are created on an annual basis. With public company’s they are produced quarterly. When it comes to ensuring consistency and comparability, these statements are generally based on the GAAP (Generally Accepted Accounting Principles). There are specific requirements that you must follow.
Having a higher analytical component, internal financial statements are more flexible. They are produced on a frequent basis, mostly weekly or monthly, and sometimes quarterly and they report by division.
Each set of financial statements includes two essential parts: the income statement and the balance sheet. Some of the statements that make up a grouping of financial statements are optional. Any statements that are created by an external accountant begin with the accountants report. They are followed by the balance sheet that is known as a financial position statement and the income statement that is known as the retained earnings statement. These two statements are followed by the cash flow statements and notes as well.
In general the preparation of these statements is based on the accrual basis. This means liabilities and assets are recorded at the time of commitment and then revenues and expenses become recorded when they have been incurred, instead of when they are paid.
It is critical to complete a balance sheet because it shows you what you have. It shows the assets, equipment, and accounts receivable. It also shows what the company owes in terms of liabilities, which are loans and accounts payables. The difference that remains between the assets and liabilities shows what is considered to be equity interest that belongs to the owner. These three amounts should always be in balance. The balance sheet gives an accurate picture of where the company is at any point and time.
The income statement is commonly referred to as the profit and loss statement. It asks the question “what did we do?” This is a statement that reflects the way the company performs during its daily operations for a set period of time. The income statement includes key elements that explain the expenses and revenues. Combined these numbers reflect the amount yielded for the loss or net income.