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.
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.
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.
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.
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.