The 3 Types of Financial Statements

Income Statement, Balance Sheet, and Statement of Cash Flows

You will find that all watchful business owners have an innate sense of how well their business is doing. Almost without thinking about it, these business owners can tell you anytime during the month how close they are to hitting budgeted figures. Certainly, cash in the bank plays a part, but it's more than that.

What is most helpful is the routine review of financial statements. There are three types of financial statements that are most important for small arts and crafts businesses. Each will give you important info about how efficiently and effectively your business is operating.

The first step in learning how to prepare financial statements is understanding the accounting system you're going to use. This is how you get transactions to show up on the financial statements. Take some time to familiarize yourself with the system you'll be using as it will save you valuable time.

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Income Statement

Financial graphs with calculator
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The income statement shows all items of income and expense for your arts or crafts business. It is also called a profit and loss statement (P&L, for short).

The income statement reflects a specific time period. For instance, an income statement for the quarter ending March 31 shows revenue and expenses for January, February, and March. If the income statement is for the calendar year ending December 31, it would contain all your information from January 1 to December 31.

The bottom line on an income statement is income minus expenses. If your income is more than your expenses, then you have a net profit. Expense more than income? You have a net loss.

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Balance Sheet

Accounting is based upon a double entry system. For every entry added into the books, there has to be an opposite and equal entry.

The net effect of the entries is zero and the result is that your books are balanced. The proof of this balancing act is shown in the balance sheet when Assets = Liabilities + Equity.

Assets are what your company has. It includes your cash on hand, accounts receivable, and the value of your inventory along with any equipment or property you own. Liabilities are what you owe such as your bills, loans, and other costs. Equity is your share of business assets as the owner, or how much you've invested.

The balance sheet shows the health of a business from day one to the date on the balance sheet. Balance sheets are always dated on the last day of the reporting period. If you’ve been in business since 1997 and your balance sheet is dated as of December 31 of the current year, the balance sheet will show the results of your operations from 1997 to December 31.

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Statement of Cash Flows

The statement of cash flows shows the ins and outs of cash during the reporting period. You may be thinking: Well, who needs that type of report? I’ll just look at the checkbook. Good point, unless you’re reporting things that don’t immediately affect cash such as depreciation, accounts receivable, and accounts payable.

If only one of these three financial statements were chosen to determine the health of a business, it would be the statement of cash flows. It is used to evaluate the ability of a company to pay dividends and meet obligations, which are extremely important in your day to day operation.

The statement of cash flows takes aspects of the income statement and balance sheet. It kind of crams them together to show cash sources and uses for the period.

With this statement, you can determine where you're spending money and how much you're bringing in. It's much more organized than your checkbook because everything is categorized.

You can, for instance, quickly see what your net income and accounts receivable are and how those compare to your accounts payable. These numbers alone can help you determine how your business is doing. If you can show a net increase in the cash flow, then everything should be going fine.

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