While preparing financial statements can seem tedious, they really are beneficial. They show you where your company’s money came from, where it went, and where it is now. Regular review of this information can help you position your business for long-term success. It can also provide potential investors or creditors with the information they need to back your business.

Four Types of Financial Documents in Accounting

If you are a small business owner or entrepreneur, these are the four basic accounting documents you are going to need.

Balance Sheet: Assets, Liabilities & Equity

One of the most important financial statements is the balance sheet or statement of financial position. This statement is a snapshot of a business’s assets, liabilities and equity, showing what it owns and what it owes at a specific point in time using the equation Assets = Liabilities + Equity.

Assets are resources owned by the company, including cash, property, inventory, vehicles and equipment. Liabilities include all the business’s debts and financial obligations or accounts payable and include things like payroll, vehicle loans and mortgages. Equity is calculated as the difference between assets and liabilities and represents the value that would be returned to the business owners if all assets were liquidated and all debts paid.

Income Statement: Revenues & Expenses

Another important financial statement is the income statement, also known as a statement of revenue and expense or a profit and loss statement (P&L). The income statement shows how much money a company has made and spent over a period of time.

This document is used to track all the money coming in and all the money going out of your business. Money going out is called expenses, and money coming in is the revenue. Typical categories on a simple income statement include sales or revenue, operating expenses and non-operating expenses. When the expenses are greater than the revenue, the income statement will show a net loss.

Cash Flow Statement: The Inflow & Outflow of Cash

This financial statement tells you where all of your cash went, providing insight into how well your business manages its cash flow. It helps the business owner or investor understand exactly where cash is coming from and where it’s going, showing if the company is spending more than it’s making, or making more than its spending.  

A typical cash flow statement format tracks cash from operating activities, cash from investing activities, and cash from financing activities. It can reveal insights into cash flow problems that are not apparent from an income statement alone.

Statement of Owner’s Equity

The fourth major business financial statement is the statement of owner’s equity, also called a statement of changes in equity, or a statement of shareholders’ equity. This document is used to show a business’s retained earnings, or profits kept by the business rather than distributed to owners or shareholders. Retained earnings are often reinvested into the company or used to pay off the business’s debts. It provides insights into the financial health of the business, showing if its capable of meeting ongoing financial and operating obligations without requiring additional capital from its owners.

Statements of owner’s equity typically include beginning equity balance, net income or loss for the period, owner investments or capital contributions, withdrawals or distributions to owners and ending balance.

Get Help for Your Small Business

While these four accounting statements can provide valuable insights into how your business is doing, they aren’t always the easiest to prepare or understand. But we can help. We are a licensed accounting firm with convenient office locations in Santa Fe and Gallup, New Mexico. We provide businesses and individuals with high-quality, professional accounting, bookkeeping, tax strategies, and financial management solutions. Contact us today for a free consultation.