Businesses are often compared to airplanes in flight. Just like a pilot, a business owner must remain vigilant and alert to keep the company on course. Pilots rely on a dizzying array of instruments and gauges to keep track of where the plane is at any one time. For business owners, these critical instruments come in the form of financial statements.
Financial statements are reports that show business activities and financial performance during a certain time period. In addition to helping business owners make decisions, these reports are often used for tax, financing, and investing purposes. Therefore, it is extremely important that financial statements be complete and accurate.
Here is a brief overview of the two most commonly used financial statements:
The Income Statement, also known as Profit and Loss, shows how much money a company earned over a period of time. This report shows all revenue (money flowing into the company), expenses (money flowing out of the company), as well as the overall net income, or total amount gained or lost during a given period.
When the income statement is set up correctly and reviewed regularly it can be extremely valuable to business owners. The income statement can show the most profitable products or services. It can also reveal where the company is spending money or where it might need to cut back or invest.
To run this report in QuickBooks Online, go to Reports > Standard > Profit and Loss.
The balance sheet shows a company’s assets, liabilities, and shareholders’ equity at a certain point in time. Assets are items that a company owns that have value. They include physical items such as property or supplies and intangible items such as trademarks and patents. Cash in the bank and money owed to the company are also considered assets. Liabilities include any money that a company owes to others. These debts could include outstanding expenses such as rent, or obligations to provide services to customers in the future. Shareholder’s equity is a company’s total assets minus its liabilities. Equity is often thought of as the money that would be returned to the shareholders if a company sold its assets and paid off its liabilities.
Combined, a company’s assets, liabilities, and equity provide great insight into where a company stands financially and how much it is worth. Does the company have a lot of outstanding debt? How valuable are the company’s assets? Is the shareholder equity positive or negative? These are all questions that business owners should pay attention to when making financial decisions.
To run this report in QuickBooks Online, go to Reports > Standard > Balance Sheet.
Just as flight instruments provide pilots with important information such as altitude, financial statements provide business owners with key indicators of how their business is doing. When used correctly, financial statements can give business owners the information they need to make important decisions and avoid costly mistakes.