Financial statements convey the financial health of your company to interested parties who might be investors, customers, creditors or the public at large. The most important components of these are called the 'primary financial statements' comprising the profit and loss account, balance sheet and cash flow. The statement of shareholders' equity might also be considered a fourth.
The profit and loss account (P&L) shows your income and expenses over a period of time such as 1 January to 31 December and so is a running picture of the company's activity in that period. As it names suggests, it ultimately shows whether you made a profit or a loss.
The balance sheet is a snapshot of the assets and liabilities of the company at a point in time, usually the end of an accounting period. It is static in that respect. It shows things like cash held, debtors, creditors and shareholders' equity.
The cash flow statement shows how cash held by the business changed over the year. Since the profit and loss reflects non cash items like depreciation, it is impacted by subjectivity and accounting policy. The balance sheet also reflects financing and changes in working capital as well as trading profits. But the real benefit here is that cash flow is objective and so allows you to see if cash is coming into the business or leaving the business, and how.
With these three primary financial statements, a great deal can be learned about the health of a company. The nuance of many things can be left to your accountant, but it is important that you are familiar with your balance sheet, P&L and cashflow.
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