What are financial statements?
The 3 main financial statements are:
Income statement; and
Cash flow statement.
What is a balance sheet?
Also referred to as the Statement of Financial Position. The balance sheet is a snapshot of the company’s Financial Position at a particular Point in Time.
A balance sheet has 3 sections:
Things that your company owns such as cash, equipment, vehicles, inventory, receivables (money owed to the business by customers) etc.
For example, sales of goods result in Revenue recorded as sales and an Asset recorded as cash or receivable as applicable.
Obligations of your company to others. Includes money owed to suppliers of goods or services, unpaid expenses, unpaid employee related payables etc.
For example, purchase of inventory from a supplier for credit results in a Liability, which is the obligation or promise to pay the supplier at a later date and an Asset, which is the inventory delivered to the business by the supplier.
The book value of your company. Let's look at the following formulas:
Equity = Assets - Liabilities
Assets = Liabilities + Equity
Equity includes capital introduced and retained earnings.
Point in time
It's important that you always keep in mind the ‘point in time’ element when reviewing your balance sheet. For example, the balance sheet of company XYZ at 31 December 2017 is a snapshot of the company’s financial position at that date. So the bank balance reflected on the balance sheet is the amount that the company has in its bank account at the close of business on 31 December 2017.