Often times when a business owner thinks about preparing financial statements they may feel like a deer in the headlights, with many (MANY) blank stares. Fortunately there are a lot of great online systems these days that quickly help you to create these financial statements with no skill involved. Sure, I had to go through Grad School and learn how to manually build a financial statement (back in my day, ha!). However you decide to prepare your financial statements there are a few key concepts that are essential for your foundation before preparing them. I’ll attempt to break down these concepts in this blog post.

In order to get an overview of the financial statements, it’s essential to understand the flow in terms of where the amounts come from. The first thing we should look at is the General Ledger. The General Ledger is where all the transactions are located for your accounting records. The General Ledger (often referred to as the “GL”) comprises various accounts, including account types such as Banking, Income, Assets, Liabilities, Expenses, and Depreciation, among others.

For example, suppose you have a company credit card and are asked to use a system like Concur to submit your expenses for review/approval and, ultimately, reimbursement. In that case, you are asked to categorize your expenses. You are using various categories such as “Travel - airfare,” “Travel - hotel,” and “Travel - meals.” Each of those categories would correspond with their specific General Ledger account. So, the total of all the General Ledger accounts makes up the balances shown on your financial statements.

Next, let’s review the three primary financial statements. These include the Income Statement (Statement of Earnings), Balance Sheet (Statement of Financial Position), and Statement of Cash Flows. The Balance Sheet, or Statement of Financial Position, represents all your cash, assets, liabilities, and equity general ledger accounts. 

The Income Statement is the statement that is generally referred to the most. This is where the reporting goes for all your Income and Expenses. The top section of the Income Statement will show all income received for the reporting period. Occasionally, this section will include a GL account referred to as the Cost of Goods sold if you’re a product-based company. The bottom section of the income statement will display all expenses, which may also include depreciation.

The Balance Sheet is unique because it is split into two sections to show how your cash plus assets equals the sum of liabilities plus equities. In fact, that is WHY it's called the Balance Sheet, meaning the total assets always equal the sum of liabilities and equity. These components are essential for providing a complete picture of your business's financial health and performance.

The Statement of Cash Flows primarily shows how the company used cash and the total inflows and outflows throughout the reporting period. This statement is beneficial if you're looking for investors because it shows your company's liquidity and financial health. It is crucial to understand the actual cash position of the business, as opposed to just its profitability on paper. Without this information you may not have a clear picture of where your business is headed for future planning.