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The Profit and Loss Statement, the Balance Sheet, and the Sources and Uses Statement are three critical statements for understanding the state of a business or entity. Each of them offers a unique perspective on how an entity operates. They show examiners the overall health of the business. Each statement provides a unique perspective on the company’s financial operations.
Here are The 3 Critical Financial Statements
The first statement, the Profit and Loss Statement, is also known as the Income Statement. It records the amount of money coming into the entity (the income) and the amount of money leaving the entity (the outflow) (the expenses). If there is more money coming in than going out, the difference between what comes in and what goes out is the Net Income. Otherwise, there is a Net Loss. The statement covers a specific time period, which is indicated in the statement’s heading. It’s worth noting that it tells us nothing about what happened on any date that isn’t covered by the statement dates. Consider it a snapshot of a specific time period. Monthly, quarterly, and yearly snapshots are all common.
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The Balance Sheet, the second statement, covers the state of the business from its inception to the statement’s end date. The Balance Sheet reveals three important business characteristics: (1) it summarizes the entity’s assets (e.g., buildings, bank accounts, inventory, and so on); (2) the entity liabilities (e.g., loans, outstanding bills, and so on); and (3) the equity of the business owners. The statement is structured in a ‘accounting equation,’ which indicates that total Assets will equal the sum of Liabilities and Equity. Balance Sheets are typically issued on the same day as Profit and Loss Statements and typically reflect the business on the last day of the Profit and Loss period.
Finally, the Financial Statement shows how the company received and spent money during the fiscal year. It shows how much money was generated by the entity’s business operations and how much was generated by loans or capital received. The statement also summarizes how the entity used the funds. It shows whether the company is healthy, in trouble, or just getting by. This statement, like the Profit and Loss, only covers the period indicated in the statement heading. It says nothing about any periods that are not mentioned in the statement. Again, the statement typically covers the same time period as the Profit and Loss Statement.
Putting these three statements together, we get a current picture of the company. The Profit and Loss Statement shows how well the company performed during the period, in the short term. From the Balance Sheet, it is possible to see how the entity accumulates assets or liabilities over time. Finally, the Financial statement shows where and how the entity’s resources were used during the period. The entity overview requires all three perspectives.
The statements provide answers to three questions about the entity to an investor or owner. Was the company profitable? Did the entity increase the equity of the owners? Finally, were entity assets utilized effectively? Further questions in specific areas may be formulated based on the overviews in these three statements.
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