Understanding the 3 major financial statements Pt 1 -What? How Much? Where?

In bookkeeping, being up to date and accurate with recording transactions and general bookkeeping is obviously a huge and essential part of the job, but it is not the only important part of the job.  In fact, some would quite accurately say that this is only half of the job.  As a 21st century bookkeeping professional, being able to analyze and interpret the recorded transactions to guide your clients financially in the right direction is imperative. 

The best tools at our disposal to do this are the 3 major financial reports, the Balance Sheet, the Income Statement (also sometimes referred to as the profit and loss or the “P & L”), and the Statement of Cash Flows.  I describe the importance as well as the difference of these statements by referring to these statements as the “What?” statement (the Balance Sheet), the “How Much?” statement (the Income Statement), and the “Where?” statement (the Statement of Cash Flows).  Let’s break these 3 different yet equally important statements down.

The Balance Sheet – What?

The Balance sheet has been described as a snapshot of the business at a given time.  It is a cumulative report that shows what the businesses financial standing is for the year up to the end point of the time period that the balance sheet covers. I refer to this as the “what?” statement, because the purpose of the statement is to show what you own (your assets) as well as what its value is, what you owe (your liabilities) in total, and what your total equity is in the business over the time period that the statement covers.  The Balance sheet is very closely related to the next statement that I will be discussing, the income statement.

The Income Statement – How Much?

The income statement is sometimes interchangeably referred to as the profit and loss or “P & L”, but for clarity I will call it the income statement. I refer to the Income Statement as the “how much?” statement, because it, as the name suggests, shows how much your income or net profit is or was over a specific time period.  The income statement is a summary of your gross income minus your expenses, which produces your net income.  The statement is concluded by whatever is your total net income (or net loss) for that time period, which carries over and reflects in the net income field on the Balance sheet for that same time period.

Statement of Cash Flows – Where?

Rounding out our summary of the 3 major financial statements is the Statement of Cash Flows.  I refer to this as the “where?” statement because it answers the question, “from where did my money come from, and where did it go?” over the specific time period that the statement covers.  This statement is divided into three categories, showing where your money came from and went to in your day to day operations (operating), your businesses investment activity such as acquiring assets to help you make more money, and your companies financing activity which, for example, would cover any loans that your business may have taken out to acquire those assets.

In part two, I will cover our role as a bookkeeper in producing, interpreting and analyzing these statements, as well as how these statements should be used together to present the big picture of the financial health of your business.

Please look around the website, and if you are interested in making that very intelligent and necessary move to get an experienced and very thorough bookkeeper to help your business grow to the next level, contact us here at herubookkeeping@gmail.com.  Producing, interpreting and analyzing financial statements so that we make a difference in our clients business’ lives is what we specialize in and what we love to do!

Terrence Satchell

Heru Bookkeeping LLC

Published by Terrence Satchell

I am an bookkeeper, entrepreneur, music connoisseur, beatmaker/instrumental artist and writer out of Philadelphia, PA.

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