Financial Statements and Accounting System

These reports spell out how well your company has performed, where it stands right now, and what it took to get there. Even though financial statements show past information, they hold the key information you need to be even more successful in the future.

In accounting, there are dozens upon dozens of reports you can create to learn specific information. To get a clear, big-picture view of your company's financial position, though, you need three very special reports. These three reports are the balance sheet, the statement of profit and loss, and the statement of cash flows.you need to bear in mind that the balance sheet is the most important financial statement that shows how much assets and liabilities that you have and the source of your working capital. On their own and working together, these three major financial statements let you know what's really going on for every aspect of your company. As a business owner, you need to know how your company is doing financially. How your company is doing financially. Financial statements are the reports that can show you just that.

At the end of every accounting period, you'll create these financial statements as part of your regular cleanup work. Virtually all small businesses prepare all three statements for every period, but a lot of these reports end up being filed away without so much as a glance — and that's a big mistake. Some business owners really look at only their year-end numbers, some don't bother printing them out at all, and some give them just a quick glance before moving on to the next project. The most successful business owners use these statements to nip potential problems in the bud, to capitalize on surprising successes, and to make sure that the numbers are in line with what they expected or planned for in the budget. The best time to deal with any of these issues, even the good ones, is right away, and you can only do that if you know what's going on.

In addition, creating these statements for yourself, you may have to put them together for someone else. For example, the statement of profit and loss will show up on your company's tax return. When you have a bank loan, the bank may want to monitor your balance sheet. The most important reader, though, is you. As you'll see in the coming articles, these reports contain a gold mine of information that will help you successfully grow a thriving business.

These Statements InterconnectEven though they each contain very distinct information, the three main financial statements are completely connected. In fact, you can't produce a balance sheet without first creating a statement of profit and loss, and you can't prepare a statement of cash flows without having already produced the other two financial statements.

The statement of profit and loss contains the bottom-line earnings for the period, whether they're positive (for profits) or negative (for losses). Those earnings are folded into the owner's equity, on the balance sheet, at the end of the period. Without that step, the balance sheet could not balance; the equity accounts are not complete until they reflect the current period earnings.

No matter which statement you're working with, all the numbers will be pulled from the general ledger (except the ones the statements calculate). All the statements also speak to the past; they are reporting what happened during the prior period, rather than what's to come.

The balance sheet is sort of the financial statement middleman. It pulls information from the statement of profit and loss and offers information to the statement of cash flows. As you might guess, the statement of cash flows needs to know how much cash the company started the period with, and then works down to the ending cash balance. Sometimes, it needs additional balance sheet information as well, such as the changes in accounts receivable and accounts payable. The statement of cash flows also gives something back to the balance sheet: verification. If the ending cash on the balance sheet doesn't match the ending cash on the statement of cash flows, there's a mistake somewhere that you need to fix.

The statement of cash flows also pulls information off the statement of profit and loss. Revenues generate cash, even if it's not immediate (as in the case of credit sales). Costs and expenses eat up cash, though again, the impact may not be immediate.

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