Three Major Financial Statements

Financial statements act like a report card for a business. The three major financial statements are prepared as a summary of figures and facts showing the financial condition of a business. They are not only used to show how a business uses its funds committed by the shareholders and the lenders, but also to see where the business stands in terms of its financial position.

• Profit & Loss Account or Income Statement
• Balance Sheet or Statement of Financial Position 
• Cash Flow Statement or Statement Accounting for Variations in Cash

Profit & Loss Account or Income Statement

After the preparation of a trading account, a profit & loss account is prepared to determine the net profit earned or net loss incurred due to the operations of a business. It is an important final account of a business which shows the summarized view of revenues and expenses for a particular accounting period.

In the horizontal form of a P&L account, Gross profit or Gross loss, whatever is determined from the trading account, is transferred accordingly. The debit side will have all expenses and the credit side – all receipts, both arising out of day-to-day activities. The difference between two sides of this account is either net profit or net loss, which is then transferred to the capital account.

(Sample Format of a P&L Account)

*Either of the two will appear. ^Any head can be used instead of the example.

Balance Sheet or a Statement of Financial Position 

After the preparation of trading and P&L account, a balance sheet is to be prepared. It is a statement that shows a detailed listing of assets, liabilities, and capital demonstrating the financial condition of a company on a given date. It is not only required to be prepared according to the companies act but also needed to ascertain the financial position of a business.

The liabilities and capital are shown on the left-hand side, whereas the assets are shown on the right-hand side. According to the accounting equation Assets = Capital + Liabilities, the total of the Left-hand side should always be equal to Right-hand side in a balance sheet.

(Sample Format of a  Balance Sheet)

Cash Flow Statement or Statement Accounting for Variations in Cash

A Cash Flow Statement is a financial statement which is mandatory to be prepared according to the law along with the other two financial statements. A cash flow statement shows the movement of cash and cash equivalents, it is an in-depth inflow and outflow for a given period of time. The statement shows the net cash flow from operating, investment and financing activities.

A cash flow statement depicts the sources and uses of a company’s cash and equivalents, which is a very important information for stakeholders.

(Sample Format of a  Cash Flow Statement)

>Read What is Bank Reconciliation Statements?