2016-12-14 00:00:00 Finance and Accounting English Preparing external reports for investors or financial institutions? Understand the four types of financial statements and the purpose each... https://quickbooks.intuit.com/ca/resources/ca_qrc/uploads/2017/06/Independent-contractor-and-driver-views-financial-statements-on-mobile-device-near-trunk-of-vehicle-on-city-street.jpg https://quickbooks.intuit.com/ca/resources/finance-accounting/four-major-financial-statements/ Understanding the Four Major Types of Financial Statements and Their Uses

Understanding the Four Major Types of Financial Statements and Their Uses

3 min read

Handling your small-business finances requires more than just knowing what’s in your bank account. Business owners use different types of [financial statements](https://quickbooks.intuit.com/ca/resources/finance-accounting/what-your-financial-statements-tell-you-about-your-business/) to get a better picture of the company’s current financial state. Each of the four main financial statements focuses on a particular aspect of your finances. While an entire set of financial statements tells the complete story of an organization, each report can stand on its own for different purposes and is often used for external reporting.

## Income Statement

As a business owner, you need to have a handle on the money coming in and going out of your business; to that end, the [income statement](https://quickbooks.intuit.com/ca/resources/profit-loss/how-to-prepare-an-income-statement/) reports the revenues and expenses of your company. When you create this report, you group and classify the expenses according to the type of cost. For example, product expenses relate to the cost to produce the good, selling expenses relate to the costs of customer outreach and product delivery, and administrative costs correlate to general company expenses. After you deduct the expenses from revenues, you report the net income at the bottom of the financial statement. This income figure comes in handy as an overall summary regarding the profitability of your business. You can use it to track expenses, especially when you compare the information to previous years. Business owners often align the income statement with the budget to analyze spending compared to the budget for the period.

## Balance Sheet

A [balance sheet](https://quickbooks.intuit.com/ca/resources/finance-accounting/how-to-prepare-a-balance-sheet/) reports your company’s assets as they compare to your liabilities and shareholders’ equity. It shows what you own, what you owe, and the amount invested by shareholders. In general, businesses either own assets or finance them through debt. The total dollar amount of your assets equals the total dollar amount of liabilities and owner’s equity. In other words, your assets = liabilities + shareholders’ equity. Both sides of the equation have to be the same to balance it out. For example, if you have a shareholder who invests $5,000 into your company, your shareholders’ equity increases by that amount as do your assets. Since both sides increase by $5,000, they stay balanced.

In addition, the asset and liability sections break out accounts based on longevity of the balances. For instance, you report long-term debt on a different line than current debt. The balance sheet is most useful in short periods of time: It’s the only financial statement based on a particular moment. While other financial statements, like the income statement, aggregate sales throughout a period, the balance sheet only reflects the current balance, such as how much cash you have in the bank at the date of the report. This makes the report useful for liquidity and solvency analysis.

## Cash Flow Statement

The [cash flow statement](https://quickbooks.intuit.com/ca/resources/cash-flow/how-to-prepare-a-cash-flow-statement/) reports the cash inflows and outflows of an organization based on multiple categories. You can use two different methods of reporting a cash flow statement, but both revolve around the concept of cash entering and exiting a business for different reasons. By using this report, you distinguish between cash received from a loan and cash received from a customer for a sale, for example. This information is vital to your success, as the report helps develop resource forecasts to plan for major upcoming expenditures.

## Statement of Changes in Shareholder Equity

Finally, the statement of changes in shareholder equity revolves around the ownership stake in the company. It shows how owners’ equity changes during the accounting period. For a small business, this statement doesn’t reflect many changes, as most small businesses only have one or minimal owners. Larger companies experience material swings in net income, dividends reported, changes in other comprehensive income, retained earnings, and private equity issuances; investors use this information to see what part of the company you finance by capital and earnings as opposed to debt.

Having a handle on your company’s financial statements keeps you informed and guides your business decisions. You’re better able to complete those statements when you keep accurate records of your finances in QuickBooks Online. 4.3 million customers use [QuickBooks](https://quickbooks.intuit.com/ca/online/). Join them today to help your business thrive for free.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

Related Articles

Increase Nonprofit Giving by Identifying Major Donors

There’s no denying that every little bit helps your nonprofit fundraising. A…

Read more

A Guide to Finance & Accounting for Small Business Owners

As a small business owner, you probably have plenty of questions on…

Read more

The Four Components of the Utility Marketing Model

The utility marketing model helps business owners design marketing campaigns that appeal…

Read more