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What Forms Part of the Financial Statements

What Forms Part of the Financial Statements?

  • Modified On: January 12, 2026

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Financial statements are written records of the entity that provide its financial situation at a given point in time. These statements are used by the shareholders, investors, management, the board of directors, employees, suppliers, customers, bankers and other related stakeholders to get an overview of the financial results and condition of the business.

Financial statements comprise of three main components balance sheet, profit and loss statement and cash flow statement. Each of these components is crucial for understanding the financial affairs of the business. Besides, they also help in making sound business decisions.

So, let us understand these components in detail.


Key Components of Financial Statements


1. Balance Sheet

Balance sheet reflects the financial position of the company at a specific period. It shows the assets owned by the company on one side and sources of funds or resources used to own such assets and the amount of shareholding on the other side. The balance sheet depicts the financial strength of the company. Let us understand the components of the balance sheet in detail.

  • Assets

    Assets include tangible assets (in the form of fixed assets and current assets) as well as intangible assets (in the form of rights and other non-physical resources that add value to the business).

  • Liabilities

    Liabilities include the debts of the entity and any obligation that might arise during the course of business. In simple words, these are amounts owed to lenders and other creditors. Liabilities include current liabilities (in the form of bills payable, creditors, etc.) and non-current liabilities (in the form of term loans, debentures, etc.).

  • Equity or Owner’s Equity

    The owner’s equity is also termed as capital contribution by the owners. It is the balance amount that is arrived after deducting the liabilities from the net assets of the company. Practically, this is the capital available for distribution to shareholders in case of an event like liquidation. Owner’s equity includes capital contributed by the shareholders, retained earnings and reserves.


2. Profit and Loss Statement

Profit and loss statement reflects the financial performance of a company over time. In simple words, it is a statement of revenues earned and expenses incurred to earn those revenues. Excess of revenues over expenditures result in profit and vice versa result in loss. Let us understand the components of profit and loss statement in detail.

Revenue

Revenue is the amount received by the company from its principle activity i.e. sale of its products or services as well as its non-core activities i.e. as a result of using the capital or assets of the business.

Expenses

Expenses refer to the outflow of money that occur for daily operational costs. It includes wages and salaries, interest paid on loans, cost of goods sold, rent expenses, import duty, etc.

Gains

Gains refer to any monetary benefit received by a company from means other than the normal operations of a business. The gains arise from nonrecurring and unusual transactions. For example, gain on sale of an asset, gift, etc.

Losses

Losses are decrease in the net assets from incidental transactions other than normal expenses of the business or distributions to owners. For example, loss on sale of land, loss from lawsuits, etc.

3. Cash Flow Statement

Cash flow statement shows the liquidity position of a company. It helps to understand the sources of cash and utilization of cash. In other words, this statement summarises the actual as well as anticipated cash inflows and outflows of a business over an accounting period. Let us understand the components of cash flow statement in detail.

  • Cash Flow from Operating Activities

    It refers to all the cash flows from the operating activities of a business. These include production, sales and delivery of products, payment from customers, inventory costs, advertising, etc.

  • Cash Flow from Investing Activities

    It refers to cash flows that arise as a result of investments. It includes gain or loss from investments, purchase of assets, etc.

  • Cash Flow from Financing Activities

    It refers to cash flows resulting from borrowing, repaying investors or raising capital for the business. It includes cash dividends, debt or interest repayment, etc.

Conclusion

The financial statements provide an insight into the financial position of a company. They act as an important source of information for making financial decisions and framing business strategies related to finance and accounting.

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