Whether you work with a CPA who provides you with monthly and annual statements, have an in-house accountant or bookkeeper, or are an individual engaged in DIY accounting, it’s important to understand the key types of accounting statements and what purpose they serve.
Below we give you a basic overview of the 4 types of accounting statements and how they are typically used.
Income Statement (aka P&L)
In short, an income statement tells you how profitable your business is. This is also called a Profit and Loss Statement, often abbreviated as P&L (P: Profit, L: Loss).
There are two key types of P&L statements, however, regardless of which type you use, the same information will be included. That information will be:
- Revenue
- Costs of Goods or Services
- Gross Profit
- Operating Expenses
- Net Income or Loss
Your income statement/P&L sheet is a high-level overview of your profits. It will not break down your income by number of goods or items sold, but rather focus on the totals. This gives you a birds eye view of what your total revenue, total costs, and total operating expenses were, and provide you with both gross profit and your net income or loss.
This statement is used to analyze a few key things: revenue, expenses, gains, and losses. Most P&L statements include the previous 2-3 periods for comparison. This can be used to asses how to increase revenue or where to cut expenses, and can be required when applying for lines of credit, loans, and grants.
Balance Sheet
While an Income Statement is a high-level overview, a balance sheet is a snapshot in time. Essentially, this sheet shows what your company owns vs. what it owes.
This statement will include things like:
- Current Assets
- Liabilities
- Shareholder Equity
Assets can be everything from property and equipment owned to cash, investments, and patents and licenses or IP.
Liabilities can include accounts payable, debts, and tax liabilities.
Shareholder equity is typically how much the shareholders have invested into the business.
The balance sheet shows how much a business owes and retains at a specific moment in time or over a specific period. Items are typically listed in order from most liquid to least liquid (i.e. how instantly accessible vs. not).
The balance sheet is typically used to determine if a company has enough working capital, keep stakeholders informed and updated on the company’s financial position, and look for areas of improvement.
Cashflow Statement
A cashflow statement is an analysis of how money is moving in and out of your business. If your cashflow statement shows a positive number, you are bringing in more money than you are spending. If your cashflow statement shows a negative number, then you are spending more money than you are bringing in.
This statement can include:
Cash inflow:
- Cash collected from customers or clients
- Interest received
- Dividends
Cash Outflow:
- Employee salaries
- Contractor payments
- Interest paid
- Cash paid to vendors, suppliers, etc.
- Income tax paid
This statement shows where you are spending money and how you are making it. Companies typically use the cashflow statement to make decisions about when and how to spend, or check against it before making key financial decisions.
Bank Reconciliation
If you’ve ever balanced a checkbook, then you have a good idea of the purpose behind a bank reconciliation statement.
A bank reconciliation statement compares your ledger against the statement you receive from your bank. The goal of this sheet is to ensure there were not any errors, and that the money paid and money received matches your records.
Companies typically use bank reconciliation statements to ensure accuracy.
Determining the Statements that Matter to You
Depending on the type, size, scale, and model of your business, these statements and records may be of different use to you.
For example, if you are a sole propriety running a small, service-based business with little overhead, you may not find a cashflow statement to be necessary, so long as you retain an accurate and updated income statement. If you run a mid-size company with employees, offices, and product costs, and especially if you have other stakeholders or partners, a cashflow statement may be absolutely necessary to make ongoing decisions.
If you work with an accountant, your CPA will help you determine your reporting needs and at what frequency. You may also need additional reports if dealing with an acquisition or sale, applying for a line of credit, or presenting to potential investors.
Our clients typically appreciate monthly and annual reports provided to them, based on the particulars of their businesses.
